Dollar Trades Near Three-Month High on U.S. Economy Optimism

By Bo Nielsen and Yasuhiko Seki

Dec. 21 (Bloomberg) -- The dollar traded near a three-month high against the euro amid signs the economic recovery is accelerating and as concern some European nations may struggle to pay their debts bolstered demand for the U.S. currency.

Gains for the dollar earlier took its advance since dropping to this year’s low on Nov. 25 to 5.6 percent as hedge funds and other large speculators put on the biggest wager since March for it to rise against the euro. The Swiss franc traded near its strongest level in nine months versus the euro amid speculation the central bank has relaxed its stance on the currency’s appreciation.

“The dollar rally has been fueled by year-end position squaring and improved economic data out of the U.S.,” said Kasper Kirkegaard, a currency analyst with Danske Bank A/S in Copenhagen who sees the dollar declining to $1.52 per euro in three months.

The dollar traded at $1.4355 per euro at 8:38 a.m. in New York, from $1.4349 on Dec. 18, when it appreciated to $1.4262, the strongest level since Sept. 4. The yen was at 129.96 per euro. The U.S. currency was at 90.5 yen from 90.49 yen. The Swiss franc was at 1.4929 per euro after trading at 1.4850, its strongest since March 12.

The dollar is rebounding as signs that U.S. economic growth is picking up pace spurred bets that the Federal Reserve will increase its target interest rate sooner than some analysts expect. Interest rate futures show a 44.5 percent chance the Fed will raise the rate by June, from 31.4 percent odds a month ago.

‘Reverse Its Losses’

“The dollar will continue to reverse its losses posted since March as the Fed moves to tighten policy next year,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London, wrote in a note today. “The market is placing too much emphasis on when the fed funds rate will be lifted and is underestimating the potential dollar- positive impact from the withdrawal of excess liquidity alone.”

Foreign-exchange futures traders increased bets that the euro will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 16,448 on Dec. 15, compared with net shorts of 511 a week earlier and a 51,045 net longs in the week ended Nov.12. It was the biggest bet against the euro since the week ended March 9.

Goldman’s Wager

Goldman Sachs Group Inc. today reiterated a bet that the dollar will decline even after the bank lost a “potential” 1.8 percent on the wager since initiating it last week.

“Timing was clearly not optimal, and we were too early in fading the recent improvements in U.S. data and the impact of Greek budget tensions,” Goldman analysts wrote in a note received today. Still, the U.S. “balance of payments situation remains very dollar negative. We would therefore continue to look for opportunities to position tactically for dollar weakness.”

The Dollar Index, which the IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners, was little changed at 77.744 today after surging 1.6 percent last week, the sharpest rally since the five days ended June 5.

The National Association of Realtors will report Dec. 22 that existing home purchases rose 2.5 percent in November to an annual pace of 6.25 million, the highest since February 2007, according to a Bloomberg News survey of economists. The Commerce Department on Dec. 23 will say sales of new homes gained 1.9 percent to a 438,000 annual pace, the fastest since August 2008, a separate survey showed.

Euro Demand

Demand for the euro weakened as the European Central Bank said lenders may have to write down an additional 187 billion euros ($268 billion) as loans to property companies and eastern European nations threaten the financial recovery.

“Sentiment in the euro zone will suffer from the fiscal troubles of its weakest members,” Mansoor Mohi-uddin, the chief currency strategist at Zurich-based UBS AG, wrote today. “This hurts the euro as it makes it less likely the ECB will be in a position to raise interest rates if one of its member countries faces the threat of defaulting on its debts in future.”

Greece’s credit rating was cut by Standard & Poor’s on Dec. 16, and the company said it may take further action unless Prime Minister George Papandreou tackles the European Union’s largest budget deficit.

Relative Strength Index

The euro’s 14-day relative strength index, or RSI, versus the dollar has been below 30 for the past three days, a level some traders view as a sign that a security is oversold.

“Technical charts are now signaling that declines of the euro may slow or stall,” Masashi Hashimoto, a Tokyo-based senior analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The Swiss franc was little changed against the euro, trading below 1.50 for the second straight day, amid speculation that the central bank has become more tolerant of a strengthening currency.

The Swiss National Bank, which began intervening in foreign-exchange markets in March to prevent gains that hampered exports and increased the risks of deflation, changed its language on currency purchases this month, saying it will act to counter “any excessive” moves in the franc against the euro. In September, the bank said it would “continue to act decisively” to prevent “any” appreciation.

‘Watch for Action’

“While the Swiss franc now draws attention as a safe haven, we should also watch for possible action by the SNB,” said Daisaku Ueno, President of Gaitame.Com Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency margin company. “The appreciation of the Swiss currency will hurt income from tourism and jeopardize growth prospects.”

Werner Abegg, a spokesman in Zurich for the SNB, declined to comment on the currency moves today.

The yen rose most against higher-yielding currencies such as the South African rand and Australian dollar amid speculation Japan’s exporters are bringing home earnings. Large Japanese manufacturers expected the yen to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Dec. 14.

“Sell orders by Japanese exporters seem to be lined up anywhere above the current level,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTradeInc., a unit of Nippon Telegraph & Telephone Corp. “But given recent stable movements in the yen, exporters are no longer in a hurry to convert their overseas sales into the yen.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net