Dollar Drops to Post WWII Low Against Yen

By Catarina Saraiva - Oct 22, 2011 4:14 AM GMT+0700

The dollar dropped to a post-World War II low against the yen and fell versus most major currencies on speculation Europe is moving closer to resolving its debt crisis and the Federal Reserve may seek further monetary easing.

The euro advanced for a fourth day against the dollar, in the longest stretch of gains since July, before two European summits over the next five days. South Africa’s rand and Australia’s dollar rallied as stocks and commodities increased, boosting demand for higher-yielding assets. The dollar remained lower versus the yen as Fed Vice Chairman Janet Yellen said new purchases of securities may be appropriate.

“Clearly the dollar is weaker against the euro on speculation that there is going to be a happy ending to the debt crisis,” said Greg Salvaggio, senior vice president of capital markets at the currency trader Tempus Consulting Inc. in Washington. “There’s a risk-on feeling in the market.”

The yen appreciated 0.7 percent to 76.29 versus the dollar at 5 p.m. in New York after touching a record high 75.82. The euro rose 0.8 percent to $1.3896, extending its weekly gain to 0.1 percent. The euro rose 0.1 percent to 105.97 yen.

The dollar dropped before meetings in Europe this weekend as bets that the U.S. currency would rally dropped from the highest level in more than a year.

“There’s broad-based dollar selling,” said Robert Sinche, global head of currency strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut. “It could just be a market that’s long of dollars and short of risk and other currencies. It’s Friday, and people are uncomfortable going into the weekend with those positions.”

Dollar Bets

Hedge funds and other large speculators pared their net long dollar positions to 126,628 in the week ended Oct. 18 after reaching 132,835 in the prior week, the most since June 2010, according to Commodity Futures Trading Commission data released today. The figures measure futures contracts on dollar bets against the euro, yen, Australian, Canadian and New Zealand dollars, pound, Swiss franc and Mexican peso.

Canada’s dollar rose for a second straight day, advancing 0.9 percent to C$1.0066 versus the greenback as the nation’s annual inflation rate rose more than forecast last month.

The consumer price index increased 3.2 percent in September from a year earlier, Statistics Canada said. The median forecast of economists was for another 3.1 percent rise.

South Africa’s rand was the best performer among the 16 most-traded currencies tracked by Bloomberg, rising 1.8 percent to 8.0408 versus the dollar as stocks and commodities gained. Australia’s currency appreciated 1.4 percent to $1.0376.

Rally in Stocks

The Standard & Poor’s 500 Index increased 1.9 percent, and the Thomson Reuters/Jefferies CRB Index of raw materials added 1.1 percent.

Yellen said in a Denver speech that a third round of large- scale securities purchases might be warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil, boosting speculation the central bank will start a third round of asset buying aimed at reviving U.S. growth. The comments followed Fed Governor Daniel Tarullo’s call yesterday for a resumption of large-scale purchases of mortgage bonds.

While almost three years of near-zero interest rates from the Fed and $2.35 trillion of asset purchases helped pull the U.S. economy out of a recession, concern is rising that gross domestic product may soon start to shrink.

Germany’s Stance

The euro rose against the dollar today as German officials said there are several possible ways of involving the International Monetary Fund to boost the firepower of the European Financial Stability Facility, the region’s rescue fund, to fight the euro-region debt crisis.

Germany favors using an insurance model to leverage EFSF funds or deepening cooperation with the IMF to expand EFSF resources, a German government official said in Berlin today, speaking on condition of anonymity.

France retreated in a clash with Germany over how to expand the power of Europe’s bailout fund. France’s view that the fund should get a banking license enabling it to borrow from the European Central Bank, “is not a definitive point of discussion for us,” French Finance Minister Francois Baroin told reporters.

Euro finance ministers meet today, followed by ministers from all 27 European Union countries tomorrow. EU and euro-area leaders gather on Oct. 23, to be capped by another euro summit Oct. 26.

The yen’s surge today came after it set a record on Aug. 19, which followed a 4.51 trillion-yen ($59 billion) intervention earlier in the month by Japan. The nation has intervened in the foreign-exchange markets three times in the past 13 months to weaken the yen. The currency is up 6.5 percent against the dollar in 2011.

‘Any Sneeze’

“People are just so flat that any sneeze like one macro fund coming in and putting a position on can move the market,” said Andrew Cox, a strategist at Citigroup Inc. in New York. “Currencies were hitting stop losses to the topside with the risk relief including the yen. It’s not a yen-specific move.”

Japan’s government will add 2 trillion yen to the 8 trillion yen in foreign-exchange reserves being shifted to the state-run Japan Bank for International Cooperation to aid exporters and spur acquisitions overseas, a document shows.

A further 2 trillion yen will be allocated to encourage investment in domestic plants and to hire workers, according to another document obtained from two government officials who declined to be identified because the plan isn’t public.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net