Dollar Gains as Euro-Zone Concern Spurs Demand for U.S. Assets

Dollar Maintains Gain Versus Yen
The dollar traded at 83.82 yen as of 8:52 a.m. in Tokyo from 83.66 yen in New York yesterday, when it gained 0.3 percent. Photographer: Andrew Harrer/Bloomberg

The dollar rose against most of its major counterparts as a possible downgrade of Spain’s credit rating rekindled concern the euro zone’s financial crisis is spreading, spurring demand for the safety of the U.S. currency.

The greenback rose against the euro as U.S. data showed a recovering economy with historically low inflation. The dollar pared gains from the most against the yen in three months as investors unwound positions. The Canadian dollar rallied against most of its major counterparts as industrial production in the U.S. increased more than forecast in November.

“You still have the debt concerns in Europe, that’s what’s weighing down on the euro,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “It’s the overall European situation and the uncertainty of how it’s going to be resolved.”

The dollar strengthened 1.2 percent to $1.3215 per euro at 5:04 p.m. in New York, from $1.3378 yesterday. It rose 0.7 percent to 84.25 yen, after touching 84.51, the most since Sept. 24.

“It’s a position unwind and the dollar is benefitting by default,” said Paresh Upadhyaya, a currency strategist at Bank of America Corp. in New York.

The Dollar Index rose as much as 1.2 percent to the highest in three days. The index is used by ICE futures exchange to track the greenback against the currencies of six major U.S. trading partners.

Global Flows

Global demand for U.S. stocks, bonds and other financial assets totaled $27.6 billion in October compared with net buying of $77.2 billion in September, the Treasury Department reported. The dollar fell 3.8 percent versus the yen and 2.3 percent versus the euro in October.

Concern Europe’s debt problems may be spreading to other countries such as Spain drove the one-year cross-currency basis swap between euros and dollars to minus 53 basis points today, near a seven-month low of 55 basis points reached Nov. 30. A negative swap rate signals that investors are willing to receive reduced euro interest payments to obtain dollar-based financing.

As European Union leaders start a two-day summit in Brussels tomorrow with the focus on a permanent crisis-fighting system to be introduced in 2013, Moody’s Investors Services said Spain’s credit rating may be cut from Aa1. The government is preparing its final bond sale of the year tomorrow amid concern it may follow Greece and Ireland in seeking a bailout.

Spain has to raise 170 billion euros ($225 billion) next year, while refinancing needs for its regions total 30 billion euros and for banks around 90 billion euros, Moody’s estimated. It doesn’t see a bailout as “likely.”

Summit Eve

“The Moody’s report, coming on the eve of the EU summit, helped to make the euro’s move more muted,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network.

The euro may rebound 11 percent versus dollar next year as investors shun U.S. assets and drive bonds lower, according to Citigroup Inc. The currency pair will follow trading patterns from the 1970s, when the housing market experienced a decline similar to the recent drop, and the 1990s, which also saw a slump in the bond market.

“It’s a bearish U.S. asset dynamic led by the bond market,” said Tom Fitzpatrick, chief technical analyst. “This period has a set-up that is amazingly like what we saw in the ‘70s, and is similar to what we saw around 1993.”

The loonie, as Canada’s dollar is nicknamed, rose 0.1 percent to C$1.0048 against the dollar and surged 1.4 percent to 1.3279 per euro, the strongest since Dec. 3.

‘Good for Canada’

“The Canadian dollar is benefitting from this buy North America, sell North America mentality in the market at the moment, with higher U.S. data, what’s good for the U.S. is deemed good for Canada to a greater or lesser extent,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank.

U.S. industrial production was helped by gains in computers, home electronics and appliances, signaling factories will support economic growth into next year.

The consumer-price index increased 0.1 percent after a 0.2 percent rise the prior month, the Labor Department said today in Washington. The median estimate of economists in a Bloomberg News survey called for a gain of 0.2 percent.

Australian and New Zealand’s currencies fell for the first time this week against the greenback as the yield advantage over the U.S. for the South Pacific nations narrowed.

Treasury yields traded near seven-month highs after Federal Reserve policy makers said yesterday the U.S. recovery is continuing and refrained from expanding a $600 billion program of debt purchases.

The extra yield investors get from buying Australia’s 10-year government bonds instead of U.S. Treasuries reached 2.14 percentage points yesterday, the least since July 15. The premium offered by three-year government debt in New Zealand over the U.S. reached 3 percentage points yesterday, the narrowest since April 26.

Australia’s currency fell 1.2 percent to 98.70 U.S. cents and New Zealand’s dollar dropped 1.6 percent to 73.97 U.S. cents.

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