Dollar Weakens as Risk Appetite Increases; N.Z. Dollar Advances

The dollar fell against most of its major counterparts amid a rise in risk appetite after German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan to curb the area’s debt crisis.

The yen strengthened versus the dollar after a report said the Bank of Japan will probably refrain from undertaking additional monetary easing at its meeting this week. New Zealand’s dollar reached a three-month high against the greenback, and Norway’s krone gained. Stocks rose, with the Standard & Poor’s 500 Index reaching its highest since May.

“We’ve seen a temporary subsiding in the risk-off trading environment,” Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp, said in a telephone interview. “The market is already very short euros and overly long dollars, so going back to a more neutral basis is consistent with what we’ve seen.” A short position is a bet a security will decline, and a long position a wager it will rise.

The U.S. currency fell 0.3 percent to 78.25 yen at 5 p.m. New York time. The greenback declined 0.1 to $1.2401 per euro, after dropping earlier as much as 0.5 percent to $1.2444, its weakest in a month, and rising 0.4 percent. The shared currency lost 0.2 percent to 97.03 yen after touching 97.80 earlier, the strongest level since July 12.

New Zealand’s dollar, nicknamed the kiwi, reached 82.24 U.S. cents, the strongest level since April 30, before trading at 82 cents, up 0.1 percent. The Norwegian krone gained 0.3 percent to 5.9602 per dollar and appreciated 0.2 percent to 7.3907 to the euro.

Aussie Unchanged

The Australian dollar was unchanged at $1.0569 before a central-bank meeting tomorrow. The currency rose 0.2 percent earlier to $1.0593, the highest since March 20, and fell as much as 0.3 percent. Reserve Bank of Australia policy makers will hold their cash rate target unchanged at 3.5 percent, according to a Bloomberg News survey.

The S&P 500 Index increased as much as 0.6 percent, and the MSCI World Index of stocks gained as much as 0.9 percent to its highest point since May 4.

The euro lost 1.1 percent in the past month versus nine developed-nation counterparts tracked by the Bloomberg Correlation-Weighted Indexes. The dollar was the worst performer, falling 2.1 percent, while Sweden’s krona rose the most, 3 percent.

Bank of Japan

The Bank of Japan, at a two-day meeting that begins Aug. 8, probably won’t change its view that the nation’s economic is picking up moderately, the Nikkei newspaper reported without citing its sources. All 17 economists in a Bloomberg News survey forecast no change in the benchmark overnight target rate of 0.1 percent.

The central bank needs to monitor the impact of a stronger yen carefully, Yoshihisa Morimoto, a BOJ board member, said on Aug. 2, speaking to reporters in Kanazawa, central Japan.

“The yen does have some independence from the dollar,” Bank of New York Mellon’s Woolfolk said. “It was never was a safe-haven currency, although it mimicked one. The yen has been supported over the last couple of weeks by repatriation on behalf of Japanese investors.”

The pound and Sweden’s krone were among the biggest losers in major currencies. Sterling reached a one-month low against the euro after U.K. reports showing weakness in the housing market underlined the fragility of Britain’s economy. The currency dropped 0.4 percent to 79.48 pence per euro after depreciating to 79.63 pence, the weakest level since July 6. It declined 0.2 percent to $1.5603.

Krona Slides

The krona dropped against the euro and dollar after Statistics Sweden said service production fell 0.2 percent from May, when it gained 2.3 percent. Production rose an annual 1.1 percent, compared with May’s 1.9 percent jump.

The currency declined 0.2 percent at 8.3244 per euro and slipped 0.1 percent to 6.7121 per dollar.

The euro gained versus the dollar after Merkel’s government backed ECB President Mario Draghi’s proposals on bond buying to help bring down borrowing costs in Spain and Italy. Germany is “not worried” by Draghi’s announcement of Aug. 2, deputy Merkel spokesman Georg Streiter told reporters at a regular press briefing in Berlin today, when asked whether the government is concerned that ECB independence might be compromised.

The shared currency may strengthen to an almost three-month high of $1.30 as European policy makers work to resolve the debt crisis, BNP Paribas SA’s Peter Gorra said.

‘Solve It’

“They’re going to solve it, and it’s going to be sooner than people think,” Gorra, chief dealer for BNP Paribas Americas, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen and Stephanie Ruhle. “What they need to do is address the short-term debt issues and the deposit-insurance schemes.”

The euro fell earlier versus the yen and dollar after Italy’s Prime Minister Mario Monti said divisions within the 17-nation currency bloc threaten the European Union’s future.

Draghi outlined a plan last week under which the ECB may buy debt of struggling euro-bloc countries in tandem with the euro area’s bailout fund, while saying the details still need to be worked out over the coming weeks. Bundesbank President Jens Weidmann said in an interview published a day before Draghi’s comments the ECB shouldn’t exceed its mandate.

Federal Reserve

The dollar dropped on Aug. 3 and U.S. stocks climbed amid speculation a payrolls gain of 163,000 jobs in July wasn’t big enough to keep the Federal Reserve from taking further steps to spur the economy. Fed policy makers said Aug. 1 after a meeting that they “will provide additional accommodation as needed,” while they refrained from expanding monetary easing this month.

Greece and its global creditors agreed on the need to strengthen policy efforts to support the economy and comply with its bailout terms after almost two weeks of meetings in Athens.

“Many people in markets are resigned to the fact that Greece may need more assistance,” Geoffrey Yu, a London-based currency analyst at UBS AG, said in a radio interview on “Bloomberg - The First Word” with Ken Prewitt. “There’s very little appetite across the euro zone, especially in the core, to provide Greece with any more money.”

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