Dollar Posts Biggest Two-Day Decline Versus Euro Since December

Feb. 20 (Bloomberg) -- The dollar posted its biggest two- day drop against the euro since December as traders withdrew bets on the greenback.

The U.S. dollar also slid versus the Swiss franc, the yen and the Australian currency as the sell-off versus the euro triggered preset orders. The dollar earlier increased as much as 0.9 percent versus the euro as Citigroup Inc. and Bank of America Corp. tumbled on speculation the U.S. government may take over the banks, encouraging demand for a haven.

“It looks to be a Friday squeeze,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “Stops were at $1.2650 to $1.2660 per euro, and they were taken out while the market dozed. Fast money is dumping dollars.”

The dollar lost 1.3 percent to $1.2846 per euro at 4:26 p.m. in New York, from $1.2674 yesterday, when it decreased 1.1 percent. The two-day drop was the biggest since Dec. 17. The dollar touched $1.2513 on Feb. 18, the strongest since Nov. 21. Japan’s currency gained 1.1 percent to 93.16 per dollar from 94.20, declining yesterday beyond 94 for the first time since Jan. 7. The yen depreciated 0.2 percent to 119.63 per euro from 119.37.

The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell for a second day, dropping 1.1 percent to 86.488. It touched 88.254 on Feb. 18, the strongest level since Nov. 21, when it reached a 2 1/2-year high.

The dollar appreciated earlier versus most of its major counterparts as a drop in global stocks encouraged investors to take refuge in the world’s reserve currency. The greenback erased its gains at about 11:45 a.m. New York time as traders took off bets.

‘Caught Long’

“Clearly the market was caught long on the dollar on the equity sell-off in financials,” said Steven Butler, director of foreign-exchange trading in Toronto at Scotia Capital, a unit of Canada’s third-largest bank. A long position is a bet an asset will appreciate.

The dollar fell 1.8 percent to 1.1530 francs, erasing an earlier gain of 1.3 percent. The dollar lost 0.4 percent to 64.63 U.S. cents against the Aussie after rising 1.3 percent.

Mexico’s peso dropped as much as 1.5 percent to 14.9855 versus the dollar, its weakest level ever, as the central bank cut the target rate by a quarter-percentage point to 7.50 percent. The median forecast of 24 economists surveyed by Bloomberg News was for a reduction to 7.25 percent.

The yen recorded a fourth straight weekly decline versus the dollar, dropping 1.3 percent, and was down 1.2 percent versus the euro. The greenback was little changed against the single currency this week.

Stocks Decline

Stocks declined today, with the MSCI World Index falling for a ninth day, retreating 1.6 percent, and the Standard & Poor’s 500 Index dropping 1.1 percent. Citigroup and Bank of America lost more than 16 percent.

Senate Banking Committee Chairman Christopher Dodd said it may be necessary to nationalize some banks for a short time. He spoke in an interview on Bloomberg Television’s “Political Capital with Al Hunt.”

“This crisis has many surprises,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada’s biggest bank by assets. “The market thought it had discounted enough negative news, and now people have to admit things are worse than we thought.”

Trichet on ‘Challenge’

The global credit crisis poses a “serious challenge” to the financial system, European Central Bank President Jean- Claude Trichet said today in a speech in Paris. The bank may lower borrowing costs again at its next meeting on March 5, he said. Policy makers will reduce the 2 percent target by a half- percentage point, according to the median forecast of 30 economists surveyed by Bloomberg News.

Europe’s manufacturing and service industries unexpectedly contracted at a record pace in February, an index based on a survey of purchasing managers by Markit Economics showed. A composite index of both industries fell to 36.2, a record low. The median forecast of 13 economists surveyed by Bloomberg News was for an increase to 38.5.

The euro touched a three-month low against the dollar on Feb. 18 on concern financial turmoil in eastern Europe may slow growth in the countries that use the common currency.

Europe’s currency dropped 1.7 percent a day earlier after Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe. The euro is down 8 percent against the dollar this year.

Germany’s Finance Ministry said today in an e-mail statement that it has “no doubts” about the cohesion of the region using the euro, while its member countries need to carry out “structural reforms” to improve competitiveness. A report in Germany’s Der Spiegel magazine saying the ministry is examining ways to bail out distressed countries “doesn’t correspond with the facts,” according to the statement.