July 2 (Bloomberg) -- The dollar rose against the euro, reversing its biggest loss in eight months, as a gauge of U.S. manufacturing unexpectedly fell, fueling bets economic growth may be faltering and stoking investor demand for safety.
The euro dropped against the yen as unemployment in the 17 nations sharing the European currency reached a record. The yen rose versus all of its major peers except Brazil’s real as the Institute for Supply Management’s U.S. factory index contracted for the first time in almost three years. The real climbed against the yen and dollar after the nation’s central bank backed it with currency swap auctions last week.
“The ISM report was substantially worse than anybody would have expected,” Alessio De Longis, a money manager at OppenheimerFunds Inc. in New York, said in a telephone interview. “We were ready for a negative surprise, just to a smaller magnitude. The world economy is in a recession at the moment, at least from a manufacturing-expectation standpoint.”
The dollar appreciated 0.7 percent to $1.2576 per euro at 5 p.m. New York time after dropping 1.8 percent June 29, the most since Oct. 27. The shared currency fell 1 percent to 100.03 yen after rising 2.2 percent on June 29, the steepest advance on a closing basis since March 2011. The Japanese currency advanced 0.4 percent to 79.51 to the dollar.
The euro slid against the greenback and the yen as the jobless rate in the currency bloc rose to 11.1 percent in May from 11 percent in April, the European Union’s statistics office in Luxembourg said today. It was the highest since the data series started in 1995. The European Central Bank will probably cut interest rates on July 5, a Bloomberg News survey showed.
“The data backdrop in Europe remains relatively challenging,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in a telephone interview. “The unemployment number puts some pressure on the ECB and their response in terms of monetary-policy easing.”
The dollar gained versus 10 of its 16 most-traded counterparts tracked by Bloomberg after the ISM’s U.S. factory index fell to 49.7 in June, 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.
Brazil’s real advanced to a level stronger than 2 per dollar for the first time in more than a month, appreciating 1.2 percent to 1.9854.
The nation’s central bank sold 180,000 swap contracts worth a total $8.98 billion in auctions June 27, 28 and 29 to shield the real from European sovereign-debt turmoil. The swaps were a reversal of the bank’s dollar purchases, which increased to $7.2 billion in April, the most in 13 months, to support Brazilian exporters.
Mexico’s currency touched the strongest level against the greenback since May 8, 13.2505 pesos, as Enrique Pena Nieto, a member of the Institutional Revolutionary Party, claimed victory in the nation’s election on a pledge to boost economic growth and private investment. The party ruled the nation for more than 70 years until 2000.
The peso briefly erased gains after the ISM said manufacturing contracted in the U.S., Mexico’s biggest trade partner. It traded later at 13.3386, up 0.2 percent.
South Africa’s rand erased gains after the factory gauge damped demand for riskier assets. The currency traded little changed at 8.1570 per dollar after touching 8.1082, its strongest level since May 14.
The Dollar Index increased 0.3 percent to 81.89. Intercontinental Exchange Inc. uses the gauge to track the greenback against the currencies of six U.S. trading partners.
The euro jumped at the end of last week after leaders in the currency bloc dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s banks. Lenders can also be recapitalized directly with European bailout funds rather than being channeled through governments, European Union President Herman Van Rompuy said June 29 after a summit. The decisions eased concern Europe’s debt crisis is worsening.
The ECB will lower its main refinancing rate to 0.75 percent at its meeting this week, according to economists in a Bloomberg survey.
Investors “have to rely on the European Central Bank to produce magic from nowhere,” Kit Juckes, head of currency research at Societe Generale SA in London, said on Bloomberg Television’s “Lunch Money” with Sara Eisen and Adam Johnson. “We’ll get another rate cut on Thursday. The greatest thing they can do for growth right now is get interest rates down.”
The shared currency may weaken almost 6 percent to a two-year low against the dollar if it fails to trade back above its June 18 high of $1.2748 or the 55-day moving average at $1.2766, according to Michael Hewson, a London-based markets analyst at CMC Markets Plc.
The euro fell 2.8 percent over the past three months in the biggest loss among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was the best performer, with a 7.6 percent gain, while the greenback appreciated 2.9 percent.
The shared currency’s risk-adjusted loss of 0.33 percent against the dollar this year was the third-biggest out of the 16 major currencies, the Bloomberg Riskless Ranking showed. The euro was last on a straight-return basis with a loss of 3 percent.
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.
Japan’s largest manufacturers expect the yen to trade at an average of 78.93 per dollar in the second half of this fiscal year, the Bank of Japan’s quarterly Tankan report showed today. They forecast 78.24 in a March survey.
Manufacturer sentiment rose to minus 1 in June from negative 4 in March, according to the report. The BOJ is scheduled to start a two-day policy meeting July 11.
The Australian dollar touched an almost two-month high amid speculation the central bank will leave interest rates on hold tomorrow. The Reserve Bank of Australia will keep its cash-rate target at 3.5 percent at tomorrow’s policy meeting, according to all 28 economists in a Bloomberg survey.
The Aussie reached $1.0278, the strongest since May 4, before trading at $1.0249, up 0.1 percent.
New Zealand’s dollar gained 0.3 percent to 80.37 U.S. cents after climbing as much as 2 percent on June 29. It touched 80.51 cents earlier today, the highest level since May 3.
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