Dollar Falls to 2-Week Low as Recovery Signs Spur Yield Demand

By Yoshiaki Nohara and Ron Harui

Oct. 8 (Bloomberg) -- The dollar fell to a two-week low against the euro as signs the global economy is recovering boosted demand for higher-yielding assets.

The U.S. currency slid against all 16 of its most-traded counterparts as Asian stocks gained before reports forecast to show improvements in German industrial output and Japanese machine orders. Australia’s dollar surged to a 14-month high after employment unexpectedly increased.

“People believe that the worst is over, which makes sense,” said Phil Burke, chief dealer for foreign-exchange spot trading at JPMorgan Securities in Sydney. “Overall, the dollar is still in a mid-term downtrend.”

The dollar dropped to $1.4754 per euro at 7:34 a.m. in London from $1.4691 in New York yesterday. It earlier touched $1.4774, the lowest since Sept. 24. The euro rose to 130.40 yen from 130.18 yen. The dollar fell to 88.37 yen from 88.61 yen. Yesterday, the greenback declined to as low as 88.01, the weakest level in more than eight months.

The MSCI Asia Pacific Index of regional shares climbed 1.2 percent, and Japan’s Nikkei 225 Stock Average added 0.3 percent. Gold climbed to a record for a third-straight day.

The dollar weakened as economists in a Bloomberg News survey forecast German industrial output expanded 1.8 percent in August following a 0.9 percent drop in July. The Economy Ministry in Berlin is set to report the data today.

A separate survey estimated Japan’s machinery orders, an indicator of capital spending in the next three to six months, gained 2.1 percent in August after a 9.3 percent drop in July. The data is due tomorrow in Tokyo.

‘Rebounding’

“The global economy is rebounding,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “That’s what the equity market is telling us and commodity markets are telling us. On that basis, I’m bullish on the euro.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, declined 0.6 percent to 76.068.

The European Central Bank will hold its main refinancing rate at a record low of 1 percent, and the Bank of England will keep its main rate at an all-time low of 0.5 percent, according to Bloomberg surveys. Both central banks meet today.

The Federal Reserve will start raising its benchmark rate in the third quarter of 2010, according to analysts’ forecasts compiled by Bloomberg.

Interest Rates

Benchmark interest rates are as low as zero in the U.S., compared with 1 percent in the euro zone, 3.25 percent in Australia and 2.5 percent in New Zealand, making assets in the 16-nation region and those South Pacific countries attractive to investors seeking higher returns.

Australia’s dollar rose 1.3 percent to 90.30 U.S. cents, the highest level since August 2008, from 89.12 cents yesterday in New York.

The number of people employed rose by 40,600 last month from August 2008, the statistics bureau said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg was for a decline of 10,000. The jobless rate fell to 5.7 percent from 5.8 percent.

Adding to signs the region’s economy is recovering, Japan’s Finance Ministry said today the nation’s current-account surplus widened 10.4 percent to 1.171 trillion yen ($13.3 billion) in August from a year earlier. The median estimate of 22 economists surveyed by Bloomberg News was for 1.15 trillion yen.

‘Uncomfortable’ Level

New Zealand’s dollar climbed to 74.01 U.S. cents from 73.64 yesterday. Earlier it touched 74.21 cents, the strongest since July 2008. New Zealand Finance Minister Bill English said he’s “uncomfortable” with the level of its currency.

“Generally when we’ve had a recession, a low dollar has helped us kick-start out of that recession,” English said in an interview in London late yesterday. “That’s clearly not going to be the case this time.”

New Zealand is being “bundled” with Australia by investors when its economy has not performed as well, exacerbating the currency’s strength, he said.

The yen traded near the highest level in more than eight months against the dollar on speculation the Bank of Japan will be quicker than the Federal Reserve in withdrawing emergency stimulus measures.

Bank of Japan Governor Masaaki Shirakawa said on Oct. 3 the need for programs to buy commercial paper and corporate bonds has eased. The central bank may decide as soon as this month to let the measures expire at the end of the year, people with direct knowledge of the discussions have said. New York Fed President William Dudley said on Oct. 5 that U.S. interest rates should stay low for a while to ensure a “robust recovery.”

“It’s possible that the BOJ may be faster than the Fed in taking exit strategies,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Corp. in Tokyo. “This may fuel buying of the yen.”

The yield advantage of benchmark 10-year Treasuries over similar-maturity Japanese government bonds narrowed to 1.92 percentage points today from 2.01 percentage points at the end of last month, diminishing the appeal of U.S. assets.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.