Dollar Gains Most in 10 Months Versus Euro on Demand for Safety

The dollar climbed the most since September against the euro as investors sought refuge after U.S. job growth fell short of forecasts and the European Central Bank said the region’s economy still faces risks.

The shared currency touched a two-year low versus the dollar amid concern an ECB cut in interest rates to a record low won’t be enough to stem the euro bloc’s debt crisis. The greenback’s advance was tempered by speculation the Federal Reserve may take further steps to boost growth, including a third round of debt purchases under quantitative easing. The U.S. central bank opens a two-day policy meeting on July 31.

“The market has a risk-off tone,” Mary Nicola, a currency strategist at BNP Paribas SA in New York, said yesterday in a telephone interview. “The data this week has been very disappointing. It shows that there are some dimming prospects to growth, to the point that the idea of QE3 might come into play next week.”

The dollar rallied 3.1 percent to $1.2291 per euro yesterday in New York, from $1.2667 on June 29. The jump was its biggest since the five days ended Sept. 9. It touched $1.2260, the strongest level since July 2010. The 17-nation currency depreciated 3.1 percent to 97.89 yen in the pair’s largest weekly drop since April 6. The Japanese currency rose 0.2 percent to 79.66 per dollar.

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners including the euro and the yen, advanced 2 percent, the most since December, to 83.285. It touched 83.431, the highest level since June 1.

The yen gained against all of its 16 most-traded counterparts this week except South Korea’s won. The euro fell against all of its major peers except the Danish krone.

Below Forecast

U.S. payrolls increased by 80,000 jobs last month after a revised gain of 77,000 in May, Labor Department data showed yesterday in Washington. Economists projected an increase of 100,000, according to the median estimate in a Bloomberg News survey. Private employment, which excludes government agencies, grew 84,000 in June, the weakest in 10 months.

“This number will continue to erode the fragile risk sentiment that we’ve been seeing lately,” Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York, said yesterday in a telephone interview. “The question will be, will this be enough to prompt the Fed to reintroduce another QE?”

Quantitative Easing

The U.S. central bank pumped $2.3 trillion into the financial system from 2008 to 2011 in two rounds of debt purchases under quantitative easing to support the economy. It’s shifting $667 billion of short-term debt in its holdings to longer-term Treasuries to cap borrowing costs, a program it expanded last month, and has kept its benchmark interest rate at zero to 0.25 percent since December 2008.

Fed officials will issue their next policy statement on Aug. 1 after a two-day meeting.

Chairman Ben S. Bernanke said June 20 after the last meeting that the Fed is prepared to consider additional steps to spur growth and employment, including further asset purchases.

The dollar climbed earlier this week on refuge demand after a gauge showed U.S. manufacturing unexpectedly shrank in June for the first time in almost three years. The Institute for Supply Management’s U.S. factory index fell to 49.7, the lowest since July 2009, from 53.5 in May. Figures less than 50 signal contraction. The median forecast in a Bloomberg News survey called for a decline to 52.

Forecasts Lowered

Fed policy makers last month lowered their forecasts for growth and raised their predictions for unemployment in each of the next three years. They now see 1.9 percent to 2.4 percent growth in 2012, down from their forecast in April of 2.4 percent to 2.9 percent. The jobless rate will end the year at 8 percent to 8.2 percent, they said, compared with the 7.8 percent to 8 percent they forecast in April.

The euro tumbled against the dollar on July 5 after ECB President Mario Draghi said euro-bloc economic growth “continues to remain weak with heightened uncertainty” and downside risks had appeared. Draghi spoke at a news conference after the central bank cut its main refinancing rate by a quarter-percentage point to a record low 0.75 percent and said it will no longer pay interest on overnight deposits.

The ECB action came the same day that China cut its key interest rate for the second time in a month and the Bank of England raised the target in its asset-purchase stimulus program by 50 billion pounds ($77 billion) to 375 billion pounds.

‘Rates Crushed’

“The euro is down because we have seen rates crushed this week, and they are going to stay low for a long time,” Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London, said yesterday in a telephone interview.

The ECB refrained from announcing any additional steps to cap debt yields in Spain and Italy, where borrowing costs have climbed amid concern Europe has yet to resolve its debt crisis. The yield on Spain’s 10-year debt climbed 63 basis points, or 0.63 percentage point, this week to 6.95 percent and touched 7.04 percent. Italian 10-year yields increased 21 basis points to 6.03 percent.

“All the ECB has managed to do this morning is increase speculation they’re going to move to further non-conventional measures later in the year,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, said July 5 in a telephone interview from Toronto. “The euro’s not emerging from this at all well.”

Commodity Currencies

Currencies of commodity-exporting nations fell against the dollar and yen as risk appetite ebbed. South Africa’s rand weakened 1.2 percent, the most in a month, to 8.2591 per dollar. New Zealand’s dollar fell 0.5 percent, its first weekly loss since May, to 79.77 U.S. cents, and Norway’s krone slid 2.6 percent, the most this year, to 6.1165 to the greenback. Brazil’s real depreciated 0.9 percent to 2.0282 per dollar.

Brazil’s real posted a risk-adjusted gain of 0.64 percent yesterday versus the greenback this year, the biggest gain, the Bloomberg Riskless Ranking shows. The yen’s advance of 0.43 percent was fourth-best, and the euro’s loss of 0.58 percent was the worst performance. The gauge covers the most-traded currencies tracked by Bloomberg.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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