Dollar Rises as U.S. Recession, Citigroup Stoke Safety Demand

Feb. 27 (Bloomberg) -- The dollar rose to the highest in almost three years against the currencies of six major U.S. trading partners as the deepening recession and the third government bailout of Citigroup Inc. stoked demand for safety.

The pound touched a one-week low against the dollar as consumer confidence in the U.K. held near the weakest in 30 years. The Hungarian forint and Polish zloty rose against the euro on speculation international aid will bolster Eastern Europe’s banking system.

“We are in the eye of the storm,” said Adnan Akant, head of foreign exchange in New York at Fischer Francis Trees & Watts Inc., which oversaw funds worth $29 billion as of mid-2008. “The economy is going down as far as ever. You would expect the dollar to strengthen.”

The dollar gained 0.6 percent to $1.2663 per euro at 4:28 p.m. in New York, from $1.2744 yesterday. The U.S. currency decreased 1 percent to 97.54 yen from 98.52. The euro dropped 1.6 percent to 123.52 yen from 125.52.

The Dollar Index, which the ICE uses to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, reached 88.490, the highest level since April 2006.

“Uncertainty is still driving the day,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “In this environment, people are still in favor of going into that safe haven until they see something to shake them out of it.”

U.S. Contraction

U.S. gross domestic product contracted at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department reported today in Washington. The government estimated that the economy shrank 3.8 percent in its advance report issued last month.

Under the rescue proposal for Citigroup, the Treasury Department would convert as much as $25 billion of preferred shares into common stock, the department said in a statement today. The government will make the swaps only if private holders agree to the same terms.

“The dollar’s reacting to the Citigroup news,” said Lane Newman, director of currency trading at ING Financial Markets LLC in New York. “The dollar has benefited from any risk aversion. That trend seems to be re-emerging.”

The pound fell as much as 1.4 percent to $1.4112, the lowest since Feb. 18, after a GfK NOP index showed U.K. consumer confidence stayed near a three-decade low. More than 40 percent of British mortgage holders may see their loans exceed the value of their homes by year-end, a separate survey by GfK NOP showed. Sterling was later little changed at $1.4316.

Hungary’s Forint

Hungary’s forint strengthened 0.7 percent to 299.75 versus the euro and the Polish zloty appreciated 1.4 percent to 4.6456 after the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank earmarked about $31 billion to help central and eastern European banks and businesses cope with the financial crisis.

The narrowing yield advantage of German government bonds over Treasuries will stoke the dollar’s gains before the greenback weakens again on concern U.S. borrowing is ballooning, David Woo, global head of foreign-exchange strategy in London at Barclays Plc, wrote in a note today.

The dollar, which added 1 percent versus the euro in February, will strengthen to $1.23 within a month, said Barclays, revising a previous forecast that anticipated a decline for the U.S. currency.

The difference in yield, or spread, between German and U.S. 10-year government notes decreased to 8 basis points, or 0.08 percentage point, near the narrowest since November.

‘Compelling Case’

“There is a compelling case to be made that Treasuries should underperform euro-zone government bonds in the near term,” Woo wrote. “The dollar’s strength will prove unsustainable, and we expect it to come under renewed selling pressures in the second half of the year.” Barclays kept its year-end forecast of $1.45 per euro.

A 7.4 percent drop in the yen versus the dollar in 2009 and an 8.2 percent decrease in the Swiss franc leaves the greenback as the only refuge from economic turmoil.

Japan’s crumbling economy weakened the yen, last year’s best performing currency, by 8 percent this month, the most since 1995, when central banks bought the dollar and sold the yen to stem the U.S. currency’s decline. The franc suffered from a deteriorating Swiss financial system and threats of intervention by the central bank to push the currency lower against the euro.

The yen rose today against the dollar after its relative strength index, a gauge used by traders to indicate changes in price direction, dropped to 23.27 yesterday, the lowest level since 2004. The index climbed to 27.54 today. A reading below 30 typically indicates that an asset price may rise.

“The market got concerned there was a bit of an overshoot,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “That’s been taken as a signal for the dollar-yen to move lower.”