Dollar May Extend Losses as Stock Rally Curbs Safety Demand

March 11 (Bloomberg) -- The dollar may extend declines against most major currencies after global stocks rallied as Citigroup Inc. said this quarter may be its best since 2007, reducing the greenback’s appeal as a refuge.

The yen may fall for a fourth day against the euro after a report showed machinery orders in Japan dropped for a fourth month in January, the longest streak of declines on record. The Australian dollar gained to the strongest in a week as U.S. stocks posted their biggest rally this year, raising speculation investors will buy riskier assets.

“An easing of the credit tightness is positive for higher- yielding currencies and negative for the dollar,” said Osamu Takashima, chief foreign-exchange analyst at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan’s biggest financial group. The dollar may be sold toward $1.30 against the euro, he said.

The dollar traded at $1.2714 per euro at 9 a.m. in Tokyo from $1.2682 late in New York yesterday. Europe’s currency was at 125.62 yen from 125.13 yen. The dollar was at 98.80 yen from 98.67 yen.

Foreign-exchange volatility, a measure of risk implied by option prices, was close to a four-month low, a JPMorgan Chase & Co. index shows. Options traders see currencies of the Group of Seven industrialized nations fluctuating by an annualized 17 percent in the next three months, compared with 27 percent on Oct. 24, which had been the most since the index started in 1992.

Australia’s currency rose to 64.75 U.S. cents from 64.59 cents. It touched 64.88 cents, the most since March 5. New Zealand’s dollar advanced to 50.53 U.S. cents from 50.33 cents late in New York.

Dollar Index

The Dollar Index, which the ICE uses to track the greenback’s performance against the currencies of six major U.S. trading partners, fell 0.4 percent to 88.688 yesterday after stock gains eroded the demand for safety. The index touched 89.624 on March 4, the highest level since April 2006.

The Standard & Poor’s 500 Index rallied 6.4 percent as Citigroup Chief Executive Officer Vikram Pandit said in a memo obtained by Bloomberg News that the bank’s current share price doesn’t reflect its earnings potential or capital position. The MSCI World Index rose 5 percent.

Machinery Orders

Japanese machinery orders slumped 3.2 percent in January from the previous month, a smaller decline than the median forecast for a 4.8 percent drop in a Bloomberg survey. The report added to evidence the world’s second-largest economy is sinking deeper into recession.

A separate government report tomorrow will show Japan’s real gross domestic product fell 13.4 percent in the final quarter of 2008, according to a Bloomberg survey. The Cabinet Office will release the revised GDP data tomorrow.

The government on Feb. 16 estimated that gross domestic product fell at an annual rate of 12.7 percent in the three months to December, the fastest since the 1974 oil shock, as exports collapsed.

Sterling may extend declines against the euro because the Bank of England’s plan to buy gilts to support the economy will probably narrow the yield advantage of U.K. government bonds over German counterparts, Bank of Tokyo-Mitsubishi said in a research note yesterday. The difference between yields on 10- year gilts and comparable German notes shrank yesterday to 0.11 percentage point from 0.19 percentage point on March 9.

The euro may gain after European Central Bank council member Axel Weber said in Frankfurt that “the bottom line” for the main rate should be 1 percent. The central bank cut the target to a record 1.5 percent on March 5.