Dollar Ends 4-Day Slide as U.S. Recovery Belies Currency’s Drop

By Bo Nielsen and Ron Harui

Oct. 16 (Bloomberg) -- The dollar snapped a four-day losing streak against the euro, rising from a 14-month low, as some investors bet that the currency’s decline was overstated given signs of a U.S. economic recovery.

The Dollar Index pared a second straight weekly drop amid speculation a report today will show industrial production rose for a third month and after European Central Bank President Jean-Claude Trichet said U.S. support for a strong dollar is “extremely important.” The pound headed for its biggest weekly gains versus the euro and the dollar in at least four months on speculation the Bank of England will stop buying bonds.

“The U.S. dollar is trading better on better news now,” said Adam Cole, head of global currency strategy at RBC Capital Markets in London. “At the same time we have ECB speakers stepping up their concern on the dollar’s weakness and that could likely stop the drop in euro-dollar.”

The dollar strengthened to $1.4892 per euro as of 10 a.m. in London, from $1.4947 in New York yesterday, when it depreciated to $1.4968, the weakest level since Aug. 13, 2008. The U.S. currency also advanced to 91.26 yen, from 90.55 yen. The euro rose to 135.90 yen from 135.35.

The Federal Reserve may say today that output at U.S. factories, mines and utilities climbed 0.2 percent in September, following increases of 0.8 percent and 1 percent in August and July, according to the median forecast of 77 economists surveyed by Bloomberg News. Another report may show consumer sentiment this month eased off the highest level in more than a year.

Pound’s Rally

The pound advanced for a fourth day against the dollar, heading for its biggest weekly gain in four months, after the Financial Times yesterday cited Bank of England Markets Director Paul Fisher as saying policy makers would be more likely to suspend asset purchases, giving themselves the option of “doing more later.” Rising asset prices and improved confidence may signal the program is working, central bank Deputy Governor Charles Bean said this week.

“If the pound can bounce, then we must be wary that the dollar can also do so,” Greg Gibbs, a currency strategist in Sydney at Royal Bank of Scotland Group Plc, wrote today in a report. “The dollar has become oversold. The bounce in the former increases the risk of a broad bounce in the dollar, even if it may only be a short-term reprieve.”

The U.K. currency climbed to $1.6367, from $1.6268 yesterday, on course for its biggest weekly advance since June 12. It also strengthened to 91.01 pence per euro, from 91.86.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners, climbed 0.2 percent to 75.652, a three-day high.

The index was still on course for a second weekly drop, extending this year’s decline to 7 percent.

“It is extremely important that the U.S. authorities, including the Treasury, the Secretary of the Treasury and the chairman of the Fed, would pursue policies that take into account the fact that a strong dollar is in the interest of the U.S.,” Trichet said at an event in Frankfurt yesterday. “Excess volatility is an enemy from the standpoint of the stability and prosperity of the global economy.”

The yen headed for a second weekly loss versus the euro and was the worst performer among the 16 most-traded currencies in the last five days as some investors doubted the Japanese government will support a stronger currency.

Policy ‘Shift’

Finance Minister Hirohisa Fujii said in Osaka yesterday governments are responsible for ensuring the stability of their currencies, which “need to reflect the strength” of economies.

“The shift in Japanese currency policy has broken the relationship between the yen and risk, but the boost to sentiment already looks to be fading,” Todd Elmer, a currency strategist at Citigroup Inc. in New York, wrote in a note yesterday. “The erosion of support from official rhetoric on the exchange rate should leave the yen more vulnerable to negative underlying fundamentals and a potential acceleration in capital outflows.”

The Japanese currency dropped to 84.09 per Australian dollar from 83.36. It earlier touched 84.22, the weakest level since October 2008.

The dollar reversed losses against the euro after the European currency’s 14-day stochastic oscillator rose to 91.9 today from 69.1 a week earlier, above the 80 threshold that signals the euro may have risen too quickly and is poised to weaken.

ECB Measures

“Technical indicators show the dollar was being oversold,” said Yoh Nihei, trading group manager at Tokai Tokyo Securities Co. in Tokyo. “Investors are adjusting their positions, buying back the currency.”

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

The euro still headed for a second weekly gain against the dollar amid speculation European Central Bank officials will today signal a withdrawal of unconventional policy measures intended to combat the recession. ECB council member George Provopoulos said the bank would quickly drop exceptional measures if they compromised price stability.

“Any non-standard measure that may pose a threat to price stability will be promptly withdrawn,” Provopoulos, who is also Governor of the Bank of Greece, said in a speech in Athens today. “If no such risk exists, a measure can be maintained in case of significant financial-market tensions.”

“ECB officials are starting to signal exit strategies as stocks gain and corporate earnings improve,” said Takeshi Tokita, vice president of foreign-exchange sales at Mizuho Corporate Bank Ltd. in Tokyo. “The market is taking that as a positive sign, benefiting higher-yielding currencies such as the euro.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net