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Dollar Falls, Narrowing Biggest Gain Versus Euro Since 2005

The dollar declined against the euro, trimming its largest yearly gain since 2005, as speculation that global economic growth will pick up next year spurred sales of the U.S. currency.

The greenback weakened against 14 of its 16 major counterparts, touching a two-week low today against the common currency, after Chancellor Angela Merkel vowed to defend the euro as “the foundation” of Germany’s economy. The pound was the best performer against the dollar, narrowing yearly losses, after U.K. home prices unexpectedly posted their first gain in seven months.

“People are seeing the rosier climate and reaching for ever riskier propositions,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. “It’s a saber-rattling moment that, in a thin market, has propelled the euro higher.”

The U.S. currency fell 0.7 percent to $1.3384 against the euro at 5 p.m. in New York, after touching $1.3425, the weakest level since Dec. 14. The dollar has appreciated 6.5 percent against the European currency this year, the steepest annual rise since 2005, as the sovereign-debt crisis deepened.

The yen strengthened 0.5 percent to 81.12 against the U.S. dollar. It was the 10th day of gains and the yen’s longest winning streak since the 12 days ended Oct. 29, 2004. The Japanese currency declined 0.1 percent to 108.47 per euro.

Economic Indicators

The U.S. currency weakened after economic reports yesterday showed business expansion, fewer jobless claims and more pending home sales. The data signaled the world’s largest economy is accelerating into the new year, encouraging demand for currencies in nations with higher-yielding assets.

Luxembourg Prime Minister Jean-Claude Juncker dismissed concerns about the future of the euro, calling it “the most solid currency in the world,” Luxemburger Wort reported.

“We are not facing a crisis of the euro, but a debt crisis in individual euro nations,” Juncker, who also leads the group of euro-area finance ministers, said in the interview published today. “The euro’s existence and its essence are not at risk.”

The 16-nation currency, which will add Estonia to its ranks tomorrow, has been the worst-performing major currency against the dollar in 2010, sliding 6.5 percent. Economists surveyed by Bloomberg forecast the shared currency slipping to $1.31 by the end of 2011. Its performance is followed by the pound, which is headed for an annual loss 3.5 percent.

Merkel’s Stance

“Europe is in the midst of a great test,” German Chancellor Merkel said in an advance text of a New Year’s speech to the nation later today. “We must strengthen the euro.”

Asian currencies recorded their best annual performance since 1998, as the region’s fastest pace of economic growth in the world and widening interest-rate premiums attracted capital from overseas. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-active currencies excluding the yen, climbed 5.2 percent in 2010.

China’s yuan strengthened today beyond 6.6 per dollar for the first time in 17 years.

“The two-speed recovery, low in advanced countries, fast in emerging-market countries, is striking and its features are increasingly stark,” International Monetary Fund economist Olivier Blanchard said in comments distributed by e-mail by the IMF yesterday in Washington. “They will probably dominate 2011, and beyond.”

The biggest winner against the greenback this year has been the yen soaring 14.7 percent. The median estimate by 36 economists sees the Japanese currency retracing to 90 in the fourth quarter of next year.

Aussie Strength

The Australian dollar was the second-best performer against the greenback, climbing 14 percent. Today it touched the strongest level against the U.S. currency since it became free-floating in 1983.

“Over the past year, Australia benefitted from Chinese demand, higher commodity prices, persistent inflation pressures, a strong labor market and the possibility of additional interest rate hikes by its central bank, which has translated into strength for its currency,” Kathy Lien, director of currency research with online currency trader GFT Forex in New York, wrote to clients.

Australia’s currency was 0.6 percent stronger at $1.0233, the highest since the 1980s. The nation stopped pegging the Aussie to a trade-weighted basket of currencies in December 1983.

Pound Gains

The pound rose 1.2 percent to $1.5612 after the average cost of a home rose 0.4 percent from November, the first monthly increase since May, Britain’s biggest customer-owned lender said in an e-mailed report today.

The dollar headed for a yearly gain as global stock, commodity and bond prices surged toward what would be the first year since 2005 all have posted annual increases.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar, rose in each of the first five months of the year as Europe’s escalating debt crisis boosted demand for U.S. assets. It declined from a high for the year in June before the Federal Reserve said it would increase asset purchases to boost growth.

The index dropped 0.7 percent today to 78.962, the lowest level since Dec. 14.

The dollar’s share of global foreign-exchange reserves fell to the lowest in at least 11 years in the third quarter as central banks increased holdings of non-traditional currencies, International Monetary Fund data showed yesterday.

The share of “other currencies,” which excludes reserve holdings of U.S. dollars, euros, British pounds, Japanese yen and Swiss francs, rose to 4 percent from 3.7 percent in the previous quarter, the most in at least 11 years.

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