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Dollar Falls From 3-Week High as Factory Gauge Damps Safety Bid

The dollar fell from the strongest level in three weeks against the euro as a gauge of U.S. manufacturing unexpectedly rose, damping demand for the refuge of U.S. government securities.

The 17-nation currency rose versus all of its 16 most-traded peers except Mexico’s peso after Spain’s latest banking and budget measures spurred bets the euro bloc is moving closer to curbing its debt crisis. It pared gains as risk appetite slipped and stocks trimmed an advance. The peso advanced as the Institute for Supply Management’s U.S. factory index gained last month for the first time since May.

“The euro-dollar move is more of a dollar-lower view,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said in a telephone interview. “We had a pop in risk right after we got the ISM manufacturing numbers, which caused the euro’s biggest spike on the day against the dollar.”

The dollar depreciated 0.2 percent to $1.2888 at 5 p.m. New York time, after gaining earlier as much as 0.4 percent to $1.2804, the strongest since Sept. 11. Japan’s currency was little changed at 77.99 against the greenback. The euro advanced

0.3 percent to 100.52 yen.

The Australian dollar touched the lowest level in more than a year against its New Zealand counterpart before the Reserve Bank of Australia holds a policy meeting tomorrow. The Aussie reached NZ$1.2469, the lowest since September 2011, before erasing losses to trade at NZ$1.2519. The currency fell 0.2 percent to $1.0361.

Low Volatility

Implied volatility, which signals the expected pace of currency swings, was at almost five-year lows. It was 7.89 after touching 7.73 on Sept. 28, its lowest since October 2007, a JPMorgan Chase & Co. index for the currencies of Group of Seven nations showed. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profit.

Europe’s shared currency fell below its 200-day moving average of $1.2824 before erasing losses. It has closed higher than the average every day since Sept. 11.

“The thing that’s been keeping the euro up today is technicals,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York. “That 200-day moving average is something we’ve been looking at for a while, and a lot of people have been talking about it. Even thought there was a test below on an intraday basis, it’s been holding up as support there. It’s a pretty key pivot.” Support is an area on a chart where buy orders may be clustered.

The Standard & Poor’s 500 Index rallied as much as 1.1 percent before reducing the gain to 0.3 percent.

Factory Gauge

The ISM’s index of U.S. manufacturing rose to 51.5 in September, the Tempe, Arizona-based group said today. A Bloomberg survey projected a reading of 49.7. The dividing line between expansion and contraction is 50.

Mexico’s peso strengthened after the report boosted the economic outlook for the nation’s chief trading partner. The currency appreciated 0.2 percent to 12.8279 to the greenback. It was little changed at 16.5362 per euro.

“Euro-Mexican is a play that we like,” Jens Nordvig, managing director of currency research in New York at Nomura Holdings Inc., said today in a television interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “Growth has been declining all over the world; the only country that’s holding up is Mexico.”

India’s rupee climbed against all of its most-traded peers, gaining 0.9 percent to 52.3950 per dollar.

‘Very Hopeful’

The euro rose versus major peers even after reports showed manufacturing in the currency bloc contracted for a 14th month in September.

“Much of the negative news has been discounted, and we’re in a position whereby the market is still very hopeful that we’re moving in Europe toward some more positive news with regards to Spain,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London.

A gauge of European manufacturing based on a survey of purchasing managers was 46.1, Markit said today. The index has held for 14 months below 50, indicating contraction.

Spain’s 10-year bonds rose for a third day, pushing the yield down six basis points, or 0.06 percentage point, to 5.88 percent. A stress test of the nation’s banks, undertaken as part of terms to win external financial aid of as much as 100 billion euros ($129 billion) and released last week, showed a deficit of

59.3 billion euros.

The euro lost 3.1 percent over the past six months, the biggest drop after the Swiss franc among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The dollar rose 0.5 percent, and the yen jumped 6.4 percent.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six U.S. trading partners, declined 0.1 percent to 79.822 after rising earlier to

80.147, the highest since Sept. 11.

The benchmark gauge may appreciate to the 80.53-to-80.73 area after reversing from its September low of 78.60, Niall O’Connor, a New York-based technical analyst at JPMorgan, wrote today in a note to clients. If the index fails to exceed that level, it may slide to 79 to 79.36 and then drop to 78.09, its low of the year, O’Connor said.

The Fed announced Sept. 13 it would buy $40 billion of mortgage-backed debt a month until the economic recovery is well-established. The U.S. jobless rate has been stuck above 8 percent for 43 straight months.

Federal Reserve Chairman Ben S. Bernanke said policy makers “expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens.” He gave a speech today in Indianapolis.

South Africa’s rand lost the most among major currencies today, falling 0.8 percent to 8.3825 per dollar, as the nation’s factory output slid to a three-year low. A purchasing managers’ index fell to 46.2 last month from 51 in August, Kagiso Tiso Holdings said. A level below 50 indicates contraction.

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