Sunday, April 13, 2008

Dollar Rises After Group of Seven Expresses Concern on Slide

By Stanley White and Bo Nielsen

April 14 (Bloomberg) -- The dollar rose the most in two weeks against the euro after Group of Seven officials expressed concern that swings in exchange rates will disrupt the global economy and financial markets.

The U.S. currency also gained the most in a week versus the yen after the G-7 said in a statement released late on April 11 in Washington that policy makers are concerned about ``sharp fluctuations,'' the first significant change in its view of currencies since February 2004. The finance ministers and central bankers didn't mention the dollar or suggest any plans to intervene in foreign-exchange markets.

``In the short-term the G-7 communiqué will be quite significant,'' said Sue Trinh, a currency strategist in Sydney at RBC Capital Markets, the global investment banking unit of Royal Bank of Canada. ``We don't think intervention is imminent but certainly a step-up in rhetoric is to be expected. I expect to see this underpinning the U.S. dollar in coming weeks.''

The dollar rose to $1.5719 per euro at 8:39 a.m. in Tokyo, from $1.5808 late in New York on April 11, after dropping 0.6 percent last week. It earlier reached, $1.56 a euro, the strongest level since April 3. It strengthened to 101.21 yen from 100.95 yen. The yen traded at 159.09 per euro from 159.55.

The U.S. currency reached a record low of $1.5913 per euro last week even as traders speculated that finance leaders would voice support for the dollar. It may advance beyond $1.55 this week as investors buy the dollar to cover their wrong way bets, Trinh said.

``Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability,'' the G-7 statement said. ``We continue to monitor exchange markets closely, and cooperate as appropriate.''

Dollar Index

The Dollar Index, which measures the currency against six of its main counterparts, has tumbled the past two months amid concern that credit-market losses will push the U.S. economy into a recession. The index is down 6.4 percent in 2008, after dropping 8.3 percent in each of the past two years.

``Traders will be more reluctant to push the dollar lower, even if there are factors that suggest it should fall,'' said Akio Shimizu, chief manager of foreign exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed bank. ``The G-7 statement may prompt some to give up on their bets for further dollar weakness.''

The dollar may rise to 102.20 yen and $1.56 per euro today, he said.

Futures Traders

Futures traders decreased their bets that the yen will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 43,067 on April 8, compared with net longs of 52,298 a week earlier.

The last time the G-7, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, intervened in the currency market was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. The G-7 last propped up the dollar in 1995, when it sank to a post-World War II low of 79.75 yen.

The G-7 downgraded its outlook for the world economy from that of two months ago, blaming the U.S. housing recession, credit-market turmoil, high commodity prices and inflation pressures.

Gains in the dollar may be limited before a Commerce Department report today that may show retail sales in the U.S. stagnated in March after dropping 0.6 percent in February, according to the median estimate of economists surveyed by Bloomberg News.

`Growth Differentials'

``There's a strong possibility that we'll soon test $1.60 again'' versus the euro, said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $20 trillion in assets under administration. ``Growth differentials are still stacked up against the dollar and since there's no sign whatsoever that the group is about to intervene, that clears the way for further dollar weakness.''

The euro failed to push through $1.60 as European Central Bank President Jean-Claude Trichet said at the press conference in Frankfurt on April 10 that financial-market tension may have ``a broader than currently expected impact on the real economy.'' Trichet spoke after the bank held the main refinancing rate at a six-year high of 4 percent.

Carry Trades

Losses in the yen and Swiss franc may be curtailed should a drop in stocks spur investors to reduce so-called carry trades.

Both currencies rose against most of the major currencies last week as investors reduced carry trades, in which they borrow funds in a country with low borrowing costs and buy assets where returns are higher. The risk is currency fluctuations erase the profits between the two rates.

The Bank of Japan held its target lending rate at 0.5 percent on April 9, the lowest among industrialized countries. The benchmark rates are 2.75 percent in Switzerland, 7.25 percent in Australia and 8.25 percent in New Zealand.

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