Dollar Declines on Reduced Demand for a Haven in a Decoupling From Europe
The dollar fell (DXY) for the third week in the past four on reduced demand for haven assets as U.S. economic data added to signs that the economy’s expansion may withstand slowing growth in Europe where leaders seek to address the region’s debt crisis.
The euro was little changed against the greenback as three- year bank loans from European Central Bank helped ensure funding for the region’s financial system in 2012. IntercontinentalExchange Inc.’s Dollar Index, a gauge of the U.S. currency against the currencies of six major U.S. trading partners, fell 0.2 percent to 79.997 this week as U.S. durable goods orders rose more than forecast before a private report projected to show consumer confidence increased this month.
“We’re seeing a divergence where euro problems are becoming euro-centric as opposed to market-wide,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto. “It’s no longer the domino theory, where what’s transpiring in Europe is automatically flowing into the Canadian dollar, the Australian dollar.”
The dollar was little changed at $1.3044 euro in New York from $1.3046 on Dec. 16. The U.S. currency rose 0.4 percent to 78.09 yen. The euro dropped 0.4 percent to 101.86 yen.
Winners, Losers
South Africa’s rand has declined 18.7 percent against the dollar in 2011, the most of the U.S. currency’s major peers, according to Bloomberg data, followed by Mexico’s peso with a 10.8 percent loss. The yen has advanced 3.9 percent for the largest gain against the greenback.
The euro depreciated 1.4 percent this year against nine developed-nation counterparts as Europe’s crisis intensified, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar has advanced 1.1 percent and the yen has gained 3.8 percent.
The ECB said Dec. 21 it had awarded 489 billion euros ($637 billion) in 1,134-day loans to banks, more than the 293 billion euros forecast by economists.
John Taylor, founder of currency-hedge fund FX Concepts LLC, said the ECB loans to euro-area banks is a form of quantitative easing and the euro is destined to slide next year.
Taylor View
“This is QE in another form,” referring to the monetary policy the Federal Reserve used in undertaking of purchasing debt to keep long-term rates low, Taylor said in a Dec. 21 interview on Bloomberg Television’s “Inside Track” with Erik Schatzker. “Three-year money at a low price -- you can give it back after a year -- it’s a giveaway. What scares me is what the hell are they going to do with it? They’ll buy Spanish and Italian debt.”
While investors speculated that banks may use the loans to buy higher-yielding sovereign debt, which could help reduce borrowing costs for European countries including Spain and Italy, signs emerged that financial institutions may be hoarding the cash for refinancing needs in 2012.
“There is a banking problem in Europe and the ECB is trying to find creative ways to ease those funding problems,” Sutton said. “At least the funding crunch of 2012 is pushed out a bit further.”
Cash parked at the central bank by financial institutions surged on Dec. 22 to 347 billion euros, up from 265 billion euros on the previous day, the Frankfurt-based ECB said.
Less Stress
Banks borrowed more than expected, which “reduces the pressure on the European financial system,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York. “It remains to be seen how much of an impact it will have on the illiquidity plaguing sovereign-debt markets.”
Italy’s two-year yields fell 20 basis points to 5.09 percent this week. They yield has declined 1.1 percentage points since ECB President Mario Draghi announced the unprecedented loans on Dec. 8.
France’s GDP rose 0.3 percent from the second quarter, when it fell 0.1 percent, French statistics institute Insee in Paris said yesterday. It had previously reported a gain of 0.4 percent. The euro-area economy will probably fail to grow next year after expanding 1.6 percent in 2011, while the U.S. is forecast to accelerate to 2.1 percent from 1.8 percent, according to Bloomberg surveys of economists.
More Ease
ECB Executive Board member Lorenzo Bini Smaghi said policy makers shouldn’t shirk from using quantitative easing if it’s needed to avoid deflation.
“Most of the likely options for the ECB will be negative for the euro,” said Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York. “The trend in European GDP is pointing to recession, which in addition to looming maturity issues in both regional sovereigns and banks is likely to have President Mario Draghi and his ECB cohorts exploring alternatives for further easing.”
The Standard & Poor’s 500 Index rose 3.7 percent. U.S. 10- year notes fell, pushing the yield up 18 basis points, or 0.18 percentage point, to 2.02 percent.
Orders for U.S. durable goods jumped in November by the most in four months, data showed yesterday, helping to offset weaker-than-forecast consumer spending. House Speaker John Boehner agreed to a two-month extension of a payroll tax cut.
The Conference Board’s index may have increased to 58.6 in December from 56 in November, according to the median estimate in a Bloomberg News survey of 61 economists before the Dec. 27 report.
Futures traders decreased their bets from a record level 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 113,697 on Dec. 20, compared with net shorts of a record 116,457 a week earlier.
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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