Forex

International Analysis

Saturday, 30 May 2009 12:53

Forex Research - Daily US Dollar Report

Dollar slips to $1.41 per Euro on economy, higher-yield demand

(Bloomberg) -- The dollar declined beyond $1.41 against the euro for the first time this year as evidence the global recession is easing sent investors in search of assets with higher returns.

The U.S. currency also posted its biggest monthly drop versus the euro in 2009 and fell today against major counterparts including the Australian and New Zealand dollars as South Korea said its state pension fund plans to hold fewer Treasuries. The U.S. securities were poised for a second month of declines on concern debt sales will overwhelm demand.

“It’s a fundamental dollar-down trade,” said James McCormick, global head of foreign exchange and local market strategy at Citigroup Inc. in London. “The truth is that countries like the U.S. with handicapped banking systems, with overextended fiscal policy, are going to see very shallow recoveries.”

The dollar weakened 1.4 percent to $1.4136 per euro at 4:17 p.m. in New York, from $1.3941 yesterday, extending its decline this month to 6.4 percent, the biggest since December, when it dropped 9.2 percent. The dollar depreciated 1.7 percent to 95.24 yen from 96.85. The yen advanced 0.3 percent to 134.67 per euro from 135.04 yesterday.

Sterling increased as much 1.6 percent to $1.6198, the highest level since Nov. 5, and posted a 9.3 percent monthly gain, the biggest since 1985. Nationwide Building Society said U.K. house prices unexpectedly jumped 1.2 percent in May, and the market researcher GfK NOP reported consumer confidence matched the highest level in almost a year.

Peso’s Gain
The peso climbed 0.3 percent to 13.1714 versus the dollar as Mexico cut its daily dollar auctions in half to $50 million from $100 million, citing “lower volatility” in the currency. The peso soared 16 percent from 15.5892 on March 9 after President Felipe Calderon lined up a $47 billion credit line with the International Monetary Fund.

Investors sold dollar-denominated assets such as Treasuries after a government projection showed the U.S. budget deficit quadrupling to $1.85 trillion.

The greenback fell today against most of the 16 major currencies tracked by Bloomberg as South Korea’s National Pension Service, which had 236 trillion won ($187 billion) of assets at the end of 2008, said it pared its allocation for Treasuries over the next five years.

“The report of the Korean pension fund’s plan to reduce its weighting of U.S. Treasuries triggered buying of the euro against the dollar,” said Takashi Kudo, director of foreign- exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

International Holdings
International investors own about 51 percent of the $6.36 trillion in marketable U.S. government debt outstanding, up from 35 percent in 2000, according to data compiled by the Treasury.

South Korea is the latest holder of U.S. government debt to reduce its holdings. China, the largest foreign owner of Treasuries, said in March it was “worried” about its $767.9 billion investment and looking for assurances the value of its holdings would be protected. China has shifted holdings into bills from notes, more at risk when interest rates rise.

The yen declined 1.5 percent against the euro this week as prospects for a global recovery spurred Japanese investors to look abroad for higher returns.

Japanese investors bought 641.1 billion yen ($6.61 billion) more overseas bonds and notes than they sold in the week ended May 23, the biggest net purchases in a month, according to the finance ministry.

Yen Versus Dollar
The yen appreciated against the dollar today, and will probably extend its gain to 90 in three months, according to Daniel Katzive, a currency strategist at Credit Suisse Group AG in New York.

“As global production and auto demand recover from very low levels, we think the yen will benefit even as risk appetite improves,” Katzive said. “You have to ask yourself if there’s any reason the yen wouldn’t gain against the dollar in a period of broad dollar weakness. Our answer is no.”

Industrial production in the world’s second-biggest economy surged the most in 56 years last month, climbing 5.2 percent from March, when it increased 1.6 percent, Japan’s Trade Ministry said today.

The 50-day moving average of ICE’s trade-weighted Dollar Index was poised to cross the 200-day moving average, a sign of “building dollar pressures,” Jeremy Stretch, a foreign- exchange analyst at Rabobank International in London, wrote in a note to clients today.

Dollar Gauge
The index, which tracks the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, fell as much as 1.5 percent today to 79.22, the lowest level this year. The gauge’s 50-day moving average was 83.77, compared with 83.59 for the same calculation over 200 days.

The greenback may fall another 10 percent this year versus U.S. trading partners, spurring traders to question how long other governments can maintain currency pegs versus the dollar, Morgan Stanley analysts led by New York-based Yilin Nie wrote in a research report dated yesterday.

Morgan Stanley recommended purchasing forwards on the Chinese yuan and Hong Kong dollar because the contracts will gain on increasing risk that the pegs break, the report said. Forwards are agreements to trade a foreign-exchange pair in the future at a predetermined price and can be settled in dollars when governments restrict conversion of local currencies.

source: http://finance.kalpoint.com/forex-research/daily-us-dollar-report/international-analysis.html