Dollar Advances as Global Slump Spurs Safety Demand

The yen rose against most of its 16 major peers as investors sought haven assets amid concern Europe’s debt crisis is weighing on the global economy and leaders are struggling to resolve the crisis.

The euro rebounded against the dollar after Italy sold 8 billion euros ($9.9 billion) of Treasury bills. It fell earlier on reports quoting European Central Bank Governing Council member Luc Coene as saying bond purchases won’t solve Spain’s and Italy’s difficulties in maintaining investor confidence. The yen rose as Japan’s economy grew less than analysts estimated and New Zealand’s dollar fell after Finance Minister Bill English said the country would prefer a weaker currency.

“The longer the politicians delay taking the necessary decisions, the greater the propensity for some of those divisions in the ECB to come to the fore, and obviously that risks being a potential drag on the euro,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “The bias remains largely to the downside for euro-dollar. Euro-yen will continue to grind as well.”

The yen gained 0.1 percent to 78.21 per dollar at 6:36 a.m. New York time and slipped 0.2 percent to 96.36 per euro. The shared European currency rose 0.3 percent to $1.2323 after weakening as much as 0.2 percent..

Bond yields have been rising because financial markets don’t trust Spanish and Italian authorities to take the measures necessary to repair their economies, Coene said in an interview with De Tijd and L’Echo published Aug. 11. As a result, he predicted few benefits from any ECB action.

ECB Purchases

Spanish and Italian bonds rose and the euro gained earlier this month after ECB President Mario Draghi said the Frankfurt- based central bank may buy government debt along with the euro- area bailout funds. The ECB later said it may take such measures only if troubled nations commit to improving their economies and fiscal positions.

The ECB is divided on what conditions should be assigned and not on the overall strategy for when to intervene, newspapers cited Coene as saying.

The euro-area economy shrank 0.2 percent in the second quarter from the previous three-month period, according to the median estimate of analysts surveyed by Bloomberg before tomorrow’s data. France contracted by 0.1 percent, while German growth slowed to 0.2 percent, separate surveys show.

“Even the rapidly expanding emerging-market economies are slowing, and the problems of the euro area continue with no obvious end in sight,” King wrote in an article in the Mail on Sunday newspaper.

Japan’s Growth

The pace of economic growth in Japan cooled to an annualized 1.4 percent in the second quarter from a revised 5.5 percent in the first three months of the year, the Cabinet Office said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg was for a 2.3 percent gain.

“Japan’s GDP highlighted the fragility of the global economic situation,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. (WBC) in Singapore. “Tomorrow’s GDP from the euro zone and the key European economies is likely to highlight a similar situation. The risks are that you see a little bit of U.S. dollar outperformance.”

The dollar has risen 6.9 percent in the past year, according to Bloomberg Correlation-Weighted Indexes, the second- best performance among the 10 currencies tracked by the gauge. The yen rose 2.9 percent and the euro lost 8.6 percent.

The U.S. currency tends to strengthen during periods of financial stress because it is the world’s reserve currency.

‘Pressure Points’

“If the periphery is going to come back at the top of the agenda, it’s going to be in September, when the ECB starts fleshing out the detail of its bond-buying program and markets start to press Spain and Italy to request help,” said Adam Cole, head of global currency strategy at Royal Bank of Canada Europe Ltd. in London. “There are all kinds of pressure points coming up.”

The shared currency declined 0.8 percent in the week ended Aug. 10, the most since the five days ended July 6.

Spain’s 10-year yield climbed to a euro-era record of 7.75 percent on July 25, while the rate on similar-maturity Italian bonds rose to a six-month high on the same day. Italy sold 8 billion euros of bills today.

Demand for the dollar was tempered before reports this week that may show improving retail sales and industrial production in the U.S. economy, the world’s largest.

Kiwi Decline

Sales increased by 0.3 percent last month after a 0.5 percent decline in June, according to the median estimate of economists in a Bloomberg News survey before the Commerce Department releases the figures tomorrow. Output at U.S. factories, mines and utilities may have risen 0.5 percent in July after a 0.4 percent gain the prior period, economists predict a Federal Reserve report will show on Aug. 15.

The so-called kiwi declined 0.2 percent to 81.15 U.S. cents.

“We would prefer that the New Zealand (ANZ) dollar was a bit lower so we could get the rebalancing in the economy moving with a bit more momentum,” English said in Wellington today. “It’s a continued challenge for exporters to be profitable at 80 cents.”

The implied volatility of three-month options on Group of Seven currencies declined, according to a JPMorgan Chase & Co. measure. The gauge dropped to 8.44, a level unseen since July 20, when it touched the lowest level since November 2007. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Sharon Chen in Singapore at schen462@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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