Dollar Weakens Amid Risk Appetite, Speculation on Central Banks

The dollar fell against most of its major counterparts as risk appetite increased amid continued speculation that central banks may take further steps to boost economic growth.

The euro rose versus the greenback for a second week, the longest stretch since June, as members of German Chancellor Angela Merkel’s coalition signaled they won’t block European Central Bank President Mario Draghi’s plan to buy government bonds. Stocks rallied as U.S. employers added more jobs than forecast even as the unemployment rate rose to a five-month high. Federal Reserve President Ben S. Bernanke may discuss policy options in an Aug. 31 speech in Jackson Hole, Wyoming.

“Fed easing is still on the table,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said yesterday in a telephone interview. “Draghi left a lot of uncertainties open. There is going to be some headline-watching now, and we expect the euro to grind lower.”

The dollar fell 0.5 percent to $1.2387 per euro this week in New York, after losing 1.3 percent in the five days ended July 27. The yen depreciated 0.5 percent to 97.19 per euro in its second weekly loss. The Japanese currency was little changed at 78.47 to the dollar.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners including the euro and the yen, fell 0.4 percent to 82.375. It dropped as much as 1.3 percent yesterday, the biggest intraday decrease since June 29.

Net Shorts

Futures traders decreased bets the euro will fall against the dollar, Commodity Futures Trading Commission data showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 138,994 on July 31, compared with 155,066 a week earlier. Net shorts reached a record 214,418 on June 8.

The greenback lost 0.7 percent this week versus nine developed-nation counterparts tracked by the Bloomberg Correlation-Weighted Indexes. The euro was little changed, while Sweden’s krona was the best performer, rising 2 percent.

The Swedish currency was the biggest winner among its 16 most-traded peers this week, climbing 2.4 percent to 6.7063 per dollar and touching 6.7048, the strongest since May 1. Sterling was the worst performer, declining 0.7 percent to $1.5640.

The Standard & Poor’s 500 Index rallied as much as 2 percent yesterday, rising for the first time in five days and erasing a weekly loss.

Flow Reversal

“Stocks have advanced greatly and held onto gains,” Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York, said yesterday in a telephone interview. “Associated with that risk-on sentiment you normally see the dollar give up some ground through the reversal of safe-haven flows.”

The greenback fell against most major peers yesterday as stocks climbed after Labor Department figures showed U.S. payrolls added 163,000 jobs in July. That followed a revised 64,000 increase the previous month that was less than initially reported. The median estimate of 89 economists surveyed by Bloomberg News called for a gain of 100,000. The unemployment rate rose to 8.3 percent, from 8.2 percent.

“You got in the sweet spot for risk because while you had an upside surprise on the headline numbers, you still have the possibility of QE3 because the unemployment rate went up as well,” said Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon. “These forays into risk are very fickle, so one swallow does not a summer make, and Monday could be a very different day.”

Quantitative Easing

The central bank bought $2.3 trillion of assets in two rounds of the stimulus strategy called quantitative easing, or QE, between December 2008 and June 2011.

While Fed policy makers refrained at a meeting that ended Aug. 1 from taking further steps to stimulate the world’s largest economy, they said in a statement they will provide additional accommodation as needed amid a slowing economy and that they will monitor developments closely.

Bernanke is scheduled to speak at the Fed Bank of Kansas City’s conference in Jackson Hole at the end of the month. His speech at the event in 2010 set the stage for a second round of asset purchases.

New Zealand’s dollar climbed for a third week against its U.S. counterpart after S&P affirmed the nation’s credit rating and said its outlook is stable. The currency, nicknamed the kiwi, rose 1.1 percent to 81.89 U.S. cents and reached 81.99 cents yesterday, its highest level since April 30. The kiwi touched NZ$1.4967 per euro yesterday, the strongest since the shared currency began trading in 1999.

Aussie Gains

The Australian dollar rose against its U.S. counterpart on prospects Reserve Bank of Australia policy makers won’t cut the highest borrowing costs among major developed nations at an Aug. 7 meeting. The Aussie appreciated 0.8 percent to $1.0569 and climbed to $1.0580 on Aug. 2, its highest since March.

Implied volatility on three-month options for Group-of-Seven currencies fell to 8.77 percent yesterday, approaching the lowest level since November 2007, according to the JPMorgan G7 Volatility Index. It reached 8.32 percent on July 20 and rose to

9.83 percent on July 24. The five-year average is 12.4 percent.

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. Key rates are 2.5 percent in New Zealand and 3.5 percent in Australia, versus zero to 0.25 percent in the U.S. and 0.75 percent in the euro bloc.

ECB Plan

The euro, stocks and commodities slid on Aug. 2 after ECB President Draghi failed to reassure investors that policy makers were ready to take immediate steps to curb Europe’s debt crisis.

ECB officials are working on a plan to buy government bonds in sufficient quantities to ease the region’s financial turmoil, Draghi said. Details will be released in coming weeks, he told reporters at a news conference in Frankfurt after a policy meeting. The central bank held its benchmark interest rate at a record low 0.75 percent.

Draghi pledged last week to do whatever it takes to preserve the shared currency.

“People are increasingly looking past the last week of Draghi and the ECB toward more fundamentally what the ECB is going to do that’s new,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said yesterday in a telephone interview. “The fundamental that the market is latching onto now is that total political support for the European debt relief effort.”

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