Dollar Drops Against Euro on Recovery Signs; Pound Advances

By Yasuhiko Seki and Ron Harui

Feb. 3 (Bloomberg) -- The dollar declined as stocks rose amid signs that the economic recovery is taking hold, fanning demand for higher-yielding currencies such as the South Korean won and the South African rand.

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, dropped for a third day before a report that may show U.S. service industries expanded at the fastest pace in more than a year. The pound rose versus the euro and the dollar after data showed U.K. consumer confidence jumped. The euro extended two days of gains against the dollar as European Commission President Jose Barroso said the body will back Greece’s plans to cut its budget deficit.

“With stocks gathering some momentum, risk aversion is abating,” said Hiroshi Maeba, deputy general manager of foreign-exchange trading in Tokyo at Nomura Securities Co., Japan’s biggest securities broker. “Buyers are returning to the higher-yielding currencies.”

The dollar weakened to $1.3978 per euro at 8:11 a.m. in London, from $1.3964 in New York yesterday. It was little changed at 90.39 yen. The pound jumped to $1.6036, from $1.5973 yesterday.

The MSCI World Index of equities rose for a third day, its longest winning streak in almost a month. Standard & Poor’s 500 Index futures advanced 0.1 percent.

Pound Gains

The Institute for Supply Management’s index of non- manufacturing companies, which make up almost 90 percent of the U.S. economy, rose to 51 from 49.8 in December, according the median estimate of 75 economists surveyed by Bloomberg News. Readings above 50 signal growth. A separate report may show companies last month cut the fewest jobs in two years.

The pound advanced against 14 of its 16 major peers after Nationwide Building Society said an index of consumer sentiment increased 3 points in January to 73, giving the Bank of England more reason to scale back measures to stimulate growth following a two-day policy meeting that ends tomorrow.

“Speculation that some Bank of England policy makers will express a hawkish view on the economy and monetary policy is supporting the pound,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow in Tokyo.

Britain returned to growth in the fourth quarter as house prices increased and unemployment began to decline, establishing a recovery in time for the election due by June. The Bank of England completed its 200 billion-pound ($325 billion) asset- purchase program on Jan. 26.

Winning Won

The South Korean won was the best-performer of the world’s major currencies today, gaining versus all 16 of its most-traded peers tracked by Bloomberg. It rose 0.9 percent versus the dollar and 0.8 percent compared with the euro.

“Global stock markets are gaining strength and it’s the same in Korea,” said Ko Yun Jin, a currency dealer at Kookmin Bank in Seoul. “Foreigners are buying stocks. Around the 1,160 level, there were a lot of exporters selling so it was hard for the Korean won to weaken.”

The upturn in stocks worldwide may not be sustainable, according to Mohamed A. El-Erian, the chief executive officer of Pacific Investment Management Co., which runs the world’s biggest mutual fund.

Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, El-Erian wrote in a Bloomberg News column. That means Wall Street projections for gains in 2010 may be incorrect and prices will slump, he said.

“Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian, 51, wrote.

Greece Buoys Euro

The Standard & Poor’s 500 Index fell 3.7 percent in January, more than any month since February 2009, after China set higher reserves for lenders and U.S. President Barack Obama proposed curbs on risk taking at banks.

The euro rose for a third day versus the dollar today after Barroso said the European Commission will recommend in a report today that the region’s finance ministers endorse the Greek deficit-cutting program at a meeting in Brussels this month. Greek Prime Minister George Papandreou yesterday pledged more action to tackle the deficit, including a freeze on state workers’ pay.

Greece needs its measures to be backed by the International Monetary Fund, Nouriel Roubini and Arnab Das of Roubini Global Economics wrote in the Financial Times. A “credible austerity plan” for Greece should ideally be backed by a large IMF program to prevent a run on public debt and banks during the tough times ahead, they said.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.