Dollar May Drop on Efforts to Spur Growth, Reduced Haven Demand

Feb. 4 (Bloomberg) -- The dollar may decline for a third day against the euro on speculation efforts to revive global economic growth will erode demand for the greenback as a haven.

The U.S. currency weakened yesterday against most of its major counterparts as the Federal Reserve extended its emergency-lending programs and foreign currency-swap lines by six months, easing demand for dollar funding. The yen dropped versus the euro as U.S. stocks gained, encouraging investors to sell Japan’s currency and buy higher-yielding assets.

“We are in the process of forming a bottom in the euro- dollar,” said Todd Elmer, currency strategist at Citigroup Global Markets in New York.

The dollar traded at $1.3036 per euro at 7:24 a.m. in Tokyo, after falling 1.5 percent yesterday and reaching $1.2706 on Feb. 2, the strongest level since Dec. 5. The dollar was at 89.51 yen, after being little changed yesterday. The yen was at 116.63 per euro after dropping 1.5 percent.

The U.S. currency fell 1.8 percent to 6.9119 Norwegian kroner and 1.6 percent to 1.1428 Swiss francs yesterday as the Fed said it was extending currency swaps with 13 other central banks through Oct. 30. The programs had been previously authorized through the end of April.

“The market is keen to put the risk trade back on,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “That helped the dollar underperform. Given that the scarcity of the dollar was a modest positive for the currency, the Fed measures suggest renewed pressure.”

The premium for swapping floating-rate, euro-denominated payments for those in dollars fell yesterday following the Fed’s announcement, signaling eased demand for dollar funding.

Cross-Currency Swap

The rate on a one-year cross-currency basis swap between euros and dollars was minus 53.4 basis points, compared with as much as minus 62.4 basis points on Feb. 2, the largest premium for dollar funding since Dec. 18. A negative swap rate signals that investors are willing to receive reduced euro interest payments to obtain dollar-based financing. A basis point equals 0.01 percentage point.

The dollar rallied 15 percent versus the euro from September to October, partly as banks and companies sought the greenback to repay dollar debt after the collapse of Lehman Brothers Holdings Inc. seized up interbank lending.

The yen fell 1.8 percent to 12.9378 versus the Norwegian krone yesterday as a 1.6 percent advance in the Standard & Poor’s 500 Index encouraged investors to resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s target lending rate of 0.1 percent compares with 3 percent in Norway.

Bank of Japan

Japan’s central bank said yesterday it will buy 1 trillion yen ($11.1 billion) of shares held by financial companies, increasing the money supply.

“The Bank of Japan’s purchases may also be aimed at staving off the exceedingly positive bias in the currency,” wrote Ashraf Laidi, the chief market strategist in London at CMC Markets, in a note to clients yesterday.

Honda Motor Co. cut its full-year profit forecast by 57 percent last week as vehicle demand in the U.S. plunged and the yen gained 23 percent against the dollar in 2008, eroding the value of exports.

Hungary’s forint tumbled yesterday as much as 2.4 percent to a record low of 303.19 versus the euro and extended this year’s decline to 11.6 percent on concern the economic slowdown will worsen. The Polish zloty slumped as much as 3.8 percent to 4.6720 versus the euro, the weakest level since June 2004.

‘A Lot of Pressure’

“Central, Eastern European currencies are under a lot of pressure,” said Karthik Sankaran, a money manager and principal in New York at Covepoint Capital Advisors, an emerging-market trading firm. “The concern may extend to core European countries, which have a lot of exposure to the region. That’s a nagging issue for the euro.”

The European Central Bank will keep its main refinancing rate at 2 percent at a policy meeting tomorrow, according to the median forecast of 53 economists surveyed by Bloomberg News.

ECB President Jean-Claude Trichet reiterated in an interview on Bloomberg Television at the World Economic Forum in Davos, Switzerland, last week that the central bank’s next important meeting is in March.

The ICE’s Dollar Index, which tracks the greenback versus the euro, the yen, the pound, the Canadian dollar, the krona and the Swiss franc, lost 1.2 percent yesterday as a report showed more Americans signed contracts in December to buy previously owned homes, also reducing demand for the safety of the world’s reserve currency.

The index of pending home resales climbed 6.3 percent to 87.7, the first increase since August, from 82.5 in November, the National Association of Realtors said yesterday.

“The market is grasping for any kind of ray of hope it can find,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “So risk aversion is receding a bit, and that works into U.S. dollar selling.”