Dollar May Drop as Economic Prospects Reduce Demand for Safety

June 10 (Bloomberg) -- The dollar may extend its decline against the euro as speculation the global recession is ending reduces demand for the U.S. currency as a refuge.

The 16-nation currency may gain for a second day against the greenback after Goldman Sachs Group Inc. recommended clients buy the euro versus the dollar, citing a recovery in world growth expectations and a “broader pickup” in demand for higher-yielding assets. The Australian and New Zealand dollars may rise against the yen after crude oil reached a seven-month high and Asian equity futures gained.

“When optimism about the global economy is out there, people feel less need to hold the dollars which they have accumulated for a rainy day,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co. “The dollar is likely to remain under pressure.”

The U.S. currency traded at $1.4056 against the euro at 8:52 a.m. in Tokyo from $1.4065 yesterday in New York. The yen was at 136.98 versus the euro from 136.98 yesterday. The dollar bought 97.45 yen from 97.38.

Australia’s dollar was at 80.04 U.S. cents and 78.00 yen from 80.15 cents and 78.04 yen yesterday in New York. New Zealand’s dollar traded at 62.58 U.S. cents and 60.99 yen from 62.71 cents and 61.08 yen in New York.

Crude oil for July delivery gained $1.92 to $70.01 a barrel on the New York Mercantile Exchange, the highest settlement since Nov. 4. Prices have risen about 60 percent this year.

‘Encouraging Sign’

The trade-weighted Dollar Index fell 1.3 percent yesterday to 79.840 after the U.S. government approved 10 banks to buy back $68 billion of government shares. Treasury Secretary Timothy Geithner said in a statement the repayments are an “encouraging sign of financial repair.”

The index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, reached this year’s low of 78.334 on June 2.

The yen fell against 12 of the 16 most-active currencies after a government report showed Japan’s machinery orders fell 5.4 percent in April from the pervious month following a 1.3 percent drop in March. The orders, an indicator of capital investment in the next three to six months, were expected to decline 0.6 percent in a Bloomberg News survey of economists.

The Bank of Japan may say in its June economic report that the economy isn’t worsening as fast as in previous months, Nikkei English News reported, without saying where it got the information. The central bank may elevate its view of the Japanese economy when the policy board meets next week as production and export declines stop and economic stimulus programs help, Nikkei said.

Goldman on Euro

Goldman Sachs in a research note yesterday said the euro will rise to $1.45 and the Federal Reserve will refrain from raising the target rate for overnight lending between banks “for a considerable period of time.”

“The timing is now opportune,” Goldman Sachs wrote. “We think the level of growth will remain below trend, and U.S. rates will be kept low for a considerable period of time.”

The dollar rose the most against the euro in five weeks on June 5 after the Labor Department reported that U.S. job cuts slowed to 345,000 in May, the lowest level in eight months.

The employment report raised speculation that the Fed will boost the target lending rate to at least 0.5 percent by the end of the year. Fed funds futures contracts showed median forecast for the yesterday a 45 percent chance of a rate increase by November, compared with 27 percent odds a week ago.