Dollar, Yen May Decline as Signs of Recovery Buy Risk Trades

Author: Yasuhiko Seki and Ruby Madren-Britton

Source: Bloomberg

Date: November 23, 2009 18:34 EST

Nov. 24 (Bloomberg) — The dollar and yen may extend their decline against other major currencies as signs of a sustained economic recovery buoy demand for higher-yielding assets.

The U.S. currency may fall for a second day against the euro ahead of a report forecast to show German business confidence rose in November. The Australian and New Zealand dollars may climb against the greenback before the Federal Reserve releases minutes from its November meeting when it specified that rates will stay unchanged.

“The underlying appetite for carry trade remains intact amid signs that the economy is recovering,” said Kosei Fujita, a foreign-currency dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “The dollar is also hostage to selling pressure on views that interest rates will stay low.”

The greenback traded at $1.4969 per euro at 8:32 a.m. in Tokyo from $1.4961 yesterday in New York. The yen was at 133.25 versus the euro from 133.11 yen yesterday. The Japanese currency was at 89.01 per dollar from 88.97 in New York.

Australia’s dollar advanced to 92.55 U.S. cents from 92.39 cents in New York yesterday. New Zealand’s currency strengthened to 73.35 U.S. cents from 73.26 in New York yesterday.

Benchmark interest rates are 3.5 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Ifo Survey

The euro gained for a second day versus the yen before the Ifo institute in Munich announces its business climate index, which rose to 92.5 in November from 91.9 in October, according to a Bloomberg survey of economists. The index, based on a poll of 7,000 executives, is scheduled for release today.

Adding to signs that the global economy is gaining traction, U.S. purchases of existing homes increased to a 6.10 million annual rate last month, the highest level since February 2007, the National Association of Realtors said yesterday. The median forecast of 66 economists in a Bloomberg survey was for an increase to 5.70 million.

Borrowing Costs

The Standard & Poor’s 500 Index gained 1.4 percent on the U.S. homes report. Stocks also rallied after Charles Evans, president of the Federal Reserve Bank of Chicago, told the Financial Times that U.S. interest rates may stay near zero until “late 2010, perhaps later in terms of 2011.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, decreased 0.7 percent yesterday to 75.129. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

Futures contracts on the Chicago Board of Trade showed yesterday a 31 percent chance that the Fed will raise interest rates by June, down from 67 percent odds a month ago.

The central bank said on Nov. 4 that it will purchase a total of $1.25 trillion of agency mortgage-backed securities through the first quarter of next year, while reiterating that interest rates will stay at almost zero for “an extended period.”

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