The dollar weakened against currencies of commodity-exporting nations including Australia and Canada as investors sought higher-yielding assets and equities advanced.
The euro fell to its lowest since 2000 versus Sweden’s krona after German Chancellor Angela Merkel said the “European project” is at risk unless policy makers work harder. Sterling declined against the greenback after the Bank of England said interest-rate cuts may be appropriate. Federal Reserve Chairman Ben S. Bernanke repeated to Congress the central bank is ready to take more steps to boost the economy if necessary.
“Stocks are marching higher even in the face of what looks to be a slowdown in the U.S. economy; that is helping risk currencies such as Mexico,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “Currencies are definitely following stocks today, and with all the central banks easing, all the money is looking for a home.”
Australia’s currency rallied against all of its 16 most- traded peers, gaining 0.5 percent to $1.0363 at 5 p.m. New York time. The Aussie touched $1.0374, the strongest since May 1. New Zealand’s dollar rose 0.3 percent to 80.04 U.S. cents, and the Canadian dollar added 0.2 percent to C$1.0102.
The euro weakened 0.1 percent to $1.2284, after dropping as much as 0.6 percent, and slid 0.4 percent to 96.80 yen. The dollar fell 0.3 percent versus the Japanese currency to 78.80.
The dollar remained lower versus the Aussie and higher against the euro after the Fed released its Beige Book business survey. It said the economy expanded at a “modest to moderate” pace last month as retail sales and manufacturing cooled in some regions. The report gives central bankers anecdotal evidence on the economy two weeks before they open a two-day policy meeting on July 31.
“We’ve been relying on U.S. corporate strength for some time,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “All through the recession the earnings have not been terrible. If you started to see the reverse, that companies are not doing well, that would definitely spook the market.”
Implied volatility on three-month options for Group-of- Seven currencies touched 8.67 percent, the lowest level since November 2007, according to the JPMorgan G7 Volatility Index. Lower volatility makes investments in currencies of nations with higher benchmark interest rates more attractive because the risk in such trades is that market moves will erase profits. The average over the past five years is 12.4 percent.
Key rates in New Zealand and Australia are 2.5 percent and 3.5 percent, versus zero to 0.25 percent in the U.S.
The dollar rose against the euro for the first time in four days as U.S. Treasury 10-year note yields fell to within four basis points, or 0.04 percentage point, of a record low 1.4387 percent reached on June 1.
An auction of German two-year notes drew a negative yield for the first time as investors sought the safety of Europe’s benchmark government debt as a haven from the financial turmoil in the 17-nation currency bloc.
“There are sharply negative rates in places like Switzerland, Denmark and Germany,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “The Fed, from a currency standpoint, is actually for once looking like it’s behind other central banks. Two-year interest rates of 0.3 percent are looking attractive compared to some other places in the world, which is giving the dollar a level of relative support.”
The European Central Bank cut its benchmark interest rate to a record low 0.75 percent on July 5, and the Bank of England raised its asset-purchase target. China reduced interest rates that day for the second time in a month.
The Fed bought $2.3 trillion of bonds from 2008 to 2011 in two rounds of a tactic called quantitative easing to spur growth. It’s “prepared to take further action as appropriate,” Bernanke told the House Financial Services Committee today, reiterating earlier statements.
The Bank of England’s nine-member Monetary Policy Committee was unanimous in a decision to keep its benchmark interest rate at a record low 0.5 percent this month, minutes of the July 4-5 meeting released today showed. While it said cutting the rate had “drawbacks” compared with more asset purchases and the arguments for and against such a move were the same as in June, this assessment could change in light of new credit measures.
Sterling depreciated as much as 0.5 percent to $1.5582 before trading little changed at $1.5653. It advanced 0.1 percent to 78.46 pence per euro and touched 78.30 pence, the strongest since October 2008.
Europe’s shared currency fell against the majority of its 16 most-traded counterparts tracked by Bloomberg.
“We haven’t yet shaped the European project in a way that we can be sure that everything will work, will turn out well,” Merkel said in an interview with her Christian Democratic Union party’s website posted today. “That means we have to keep working. Still, I’m optimistic that we will succeed.”
Sweden’s currency climbed amid speculation the nation’s central bank won’t act to halt gains in the currency of the largest Nordic economy.
The Swedish krona gained as much as 0.9 percent to 8.4781 per euro, its strongest since December 2000, before trading at 8.5182, up 0.5 percent. It appreciated 0.4 percent to 6.9345 per dollar.
The yen reversed yesterday’s losses against the dollar, trading below 79 to the dollar for a third straight day.
The greenback fell through its 200-day moving average of 79.06 and may now find support at its June 15 low of 78.61 yen, according to data compiled by Bloomberg.
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