Dollar Rises to 3-Month High as U.S. Economic Outlook Improves

By Yasuhiko Seki and Yoshiaki Nohara

Dec. 17 (Bloomberg) -- The dollar climbed against 15 of its 16 major counterparts as signs the U.S. recovery is gaining momentum boosted demand for the greenback. The euro sank to a three-month low after Greece’s downgrade reignited credit concerns in the currency’s 16-nation region.

The greenback rose before reports forecast to show U.S. initial jobless claims slowed and a gauge of the outlook for the world’s largest economy improved for an eighth month. The Federal Reserve said yesterday the U.S. economy is strengthening, while Standard & Poor’s cut Greece’s rating one level on its rising debt burden. The Australian dollar sank to a 10-week low as Asian stocks fell, curbing demand for higher-yielding assets.

“An improvement of the labor market enhances confidence in the U.S. economy,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “The dollar will fare well.”

The dollar rose to $1.4369 per euro, the highest since Sept. 8, before trading at $1.4406 as of 7:35 a.m. in London from $1.4531 in New York yesterday. The U.S. currency was at 89.70 yen from 89.78 yen after earlier hitting 90.26, the strongest level since Dec. 7. The euro sank to 129.17 yen from 130.46 yen.

U.S. initial jobless claims fell to 465,000 last week from 474,000 in the week to Dec. 5, according to a Bloomberg survey of economists before the Labor Department’s report. A separate poll showed the Conference Board’s index of leading indicators, a gauge of the U.S. outlook for the next three to six months, rose 0.7 percent in November, following a 0.3 percent gain the previous month. Both reports are scheduled for release today.

Household Spending

“Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said in its policy statement yesterday after meeting in Washington. Deterioration in the labor market is “abating.”

Policy makers held the target rate for overnight lending between banks at zero to 0.25 percent, a decision forecast by all 98 economists in a Bloomberg survey.

“There’s some acknowledgement of improved economic conditions including the labor market,” said Ray Attrill, global research director at Forecast Ltd. in Sydney. “We still think there’s a signal that informs the market there will be some Fed balance sheet shrinkage coming through in 2010,” a supportive factor for the dollar, he said.

Bullish on Dollar

Investors turned bullish on the dollar for the first time since March as the U.S. economy showed evidence of a sustained recovery, a survey of Bloomberg users indicated.

Sentiment toward the currency rose to 51.99 in December, according to the survey. A reading above 50 indicates Bloomberg users expect the dollar to strengthen. The reading was last above 50 in March, when it reached 53.41.

“With the key driving force gradually shifting toward interest-rate differentials from risk sentiment, good economic data may begin to support the dollar more directly,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo.

The euro fell for a third day against the dollar after S&P joined Fitch Ratings in downgrading Greece, which has the widest budget deficit in the European Union.

The rating was lowered by one level to BBB+ from A-, S&P said in a statement late yesterday. Fitch on Dec. 8 cut Greek debt to BBB+. Austria said on Dec. 14 that it was nationalizing Hypo Alpe-Adria Bank and injecting as much as 450 million euros ($649 million) into the lender.

BOJ Meeting

“Concerns over the health of finances in some member countries, including Greece, together with uncertainties over the depth of financial woes in the Austrian banking sector will continue to weigh on the euro,” said Keiji Matsumoto, currency strategist in Tokyo at Nikko Cordial Securities Inc.

The Australian dollar weakened as a decline in Asian stocks pared demand for riskier assets. The currency slumped 1.2 percent to 89.00 U.S. cents, after hitting 88.73 cents, the weakest since Oct. 7. The MSCI Asia Pacific Index reversed earlier gains, losing 0.9 percent.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.