Dollar, Yen Gain as Euro, Pound Weaken on Deepening Recession

March 27 (Bloomberg) -- The dollar and yen rose as traders fled the euro and pound on evidence Europe’s recession is deepening.

The 16-nation currency fell the most against the dollar in almost three months as industrial orders in the region plunged in January, adding to bets the European Central Bank will need to consider buying bonds to promote growth. The pound dropped to a one-week low as the U.K.’s economy contracted in the fourth quarter more than economists forecast.

“You’ll still see people coming to the dollar for support,” said Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, the world’s second-largest currency trader. “The data’s been pretty bad over the last couple of weeks, and it doesn’t help the perception that the ECB’s going to refrain from doing anything.”

The euro decreased as much as 2 percent to $1.3257, the biggest intraday drop since Jan. 9, before trading at $1.3292 at 4:23 p.m. in New York. Europe’s currency extended its decline this week to 2.1 percent. The yen gained 2.5 percent to 130.15 per euro from 133.52. The dollar weakened 0.8 percent to 97.92 yen from 98.71. The pound lost 1.8 percent to 140.17 yen.

The pound fell for a third day versus the dollar after a government report showed Britain’s gross domestic product contracted in the fourth quarter by a greater-than-forecast 1.6 percent, the biggest plunge since Margaret Thatcher was prime minister in the 1980s.

‘Taken Aback’

“The market was somewhat taken aback by the downward revision in the U.K. growth numbers,” said Derek Halpenny, European head of global currency research at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “If anything, people were expecting an upward revision.”

Sterling weakened as much as 1.3 percent to $1.4269, the lowest level since March 19. The currency fell 1.7 percent versus the dollar in the first quarter for a third straight drop, the longest stretch of quarterly decline since 2005. The pound increased 0.7 percent to 92.96 pence per euro today.

Industrial orders in the euro area fell 34 percent in January from a year earlier, the biggest drop since the data series started in 1996, a report from the European Union’s statistics office in Luxembourg showed today.

Norway’s krone was the biggest gainer versus the dollar in the first quarter among the most actively traded currencies tracked by Bloomberg, advancing 5 percent as oil prices rose.

New Zealand Dollar

The New Zealand and Australian dollars headed for their biggest monthly advances against the greenback in more than 20 years on commodity gains, advancing 14 percent to 56.99 U.S. cents and 8.3 percent to 69.31 U.S. cents, respectively. The New Zealand dollar in March erased 24 percent of its slump from a 26-year high reached on Feb. 27, 2008.

“We’ve been seeing strength in flows from our indicators into commodity-producing equity markets around the world,” said Robert Blake, head of North America strategy in Boston at State Street Global Markets LLC, which has $12 trillion in assets under custody. “Commodities are always a great inflation hedge, so that’s also fueled some buying for Norway, Australia, New Zealand.”

Norway is the world’s fifth-largest oil producer, and New Zealand relies on sales of milk powder, butter, cheese and aluminum. Demand for Australian coal, iron ore and wool drove 17 consecutive years of economic expansion.

The krone pared its quarterly gains today, dropping 1.9 percent to 6.6284 versus the greenback as Norges Bank Governor Svein Gjedrem said in an interview on Bloomberg Television yesterday that policy makers may bring the target lending rate below 1 percent if the Norwegian economy weakens more than expected.

Citigroup on Euro

Citigroup Inc. said it ended a bet that the euro will strengthen against the dollar as pressure mounted on the ECB to follow the Federal Reserve in buying bonds to lower interest rates, a policy known as quantitative easing.

“We are taking off our long euro-dollar trade on the lack of follow-through from the introduction of quantitative easing in the U.S. and the pressure on the ECB to move in the same direction,” analysts led by Jim McCormick, Citigroup’s London- based global head of foreign-exchange and local-markets strategy, wrote in a report today. “We believe that dollar weakness will remain a dominant theme but see better opportunities in other places.”

The U.S. currency strengthened against most of its peers as stocks slid, increasing demand for safety. The Dow Jones Stoxx 600, a benchmark for Europe, fell 0.6 percent after a six-day rally. The Standard & Poor’s 500 Index lost 1.4 percent.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, climbed 1.2 percent today to 85.16 It fell to 82.63 on March 19, the lowest level since Jan. 9.

Group of 20

Some analysts said the dollar may extend gains against the euro on speculation Group of 20 nations will fail to agree on measures to resolve the financial and economic crises when their representatives meet in London on April 2.

“The rift has grown between the U.S. and Europe,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “We may end up again having quite a disappointing G-20 meeting.”

German Finance Minister Peer Steinbrueck said the euro may be hurt if member states stray from the 27-nation European Union’s debt-limit rules as they combat the economic crisis. Germany has a “massive” interest in the EU’s Stability and Growth Pact limiting debt to 3 percent of gross domestic product, Steinbrueck told lawmakers in Berlin today.