Dollar, Yen Decline as Recovering Economy Eases Refuge Appeal

Aug. 22 (Bloomberg) -- The dollar and yen fell against the majority of their most-traded counterparts as U.S. housing and manufacturing reports signaled that the economy is recovering from recession, easing demand for the currencies as a refuge.

The euro also rose on the week against the dollar and yen as German services and French manufacturing unexpectedly expanded in August. The Norwegian krone climbed to the strongest level against the euro since March after a report showed the world’s fifth-largest oil exporter emerged from a recession.

“The data has been a little more encouraging,” said Robert Lynch, head of currency strategy at HSBC Bank in New York. The stock market “responded well to that, and to some extent, that was consistent with risk appetite and a lower dollar and a weaker yen.”

The greenback slumped 0.9 percent to $1.4326 per euro yesterday from $1.4203 on Aug. 14, while also dropping more than 1 percent against the South African rand, Swedish krona, Canadian dollar and Swiss franc. The yen fell 0.3 percent to 135.21 per euro, from 134.84 last week. Japan’s currency also declined versus the rand, krona and franc. The dollar fell 0.6 percent this week to 94.38 yen.

The Standard & Poor’s 500 Index gained 2.2 percent on the week, touching a 10-month high yesterday. Europe’s Dow Jones Stoxx 600 Index advanced 2.7 percent.

An index of the German services industry rose to 54.1 this month from 48.1 in July, Markit Economics said yesterday. The French manufacturing index increased to 50.2 in August from 48.1 the prior month. A reading above 50 indicates expansion. Economists forecast both indexes would remain below 50, according to a Bloomberg News survey.

‘Point of Exhaustion’

The global economy is “beginning to emerge” from a recession after aggressive action by central banks and governments, Federal Reserve Chairman Ben S. Bernanke said yesterday at a symposium in Jackson Hole, Wyoming.

Sales of existing U.S. homes climbed 7.2 percent to a 5.24 million annual rate, the most since August 2007, according to the National Association of Realtors yesterday. The gain was the biggest since records began in 1999.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to 4.2 from minus 7.5 in July, the bank said Aug. 20. Positive readings signal an expansion. The leading U.S. economic indicators rose in July for a fourth consecutive month, the Conference Board reported separately the same day.

‘Disorderly Decline’

A damaging drop in the dollar, volatile financial markets and slower global growth may result as the Fed and other central banks show few signs of reprising the coordinated stance they took combating the financial crisis as they deal with its aftermath, according to Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co.

“The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian, a former deputy director of the International Monetary Fund, in an interview. “The real risk is that you will get a disorderly decline.”

The greenback is threatened as net debt will increase to 56 percent of U.S. gross domestic product, the billionaire investor Warren Buffett wrote in a New York Times commentary this week.

The dollar as a percentage of global central banks’ foreign reserves increased to 65 percent in the first three months of the year, from 64.1 percent in the previous quarter, according to the International Monetary Fund. Its share has remained around 65 percent the last five years, after falling from 72.7 percent in 2001.

Questionable Value

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against the yen, euro, Swiss franc, British pound, Swedish krona and Canadian dollar, dropped for a second week, falling 1.1 percent to 78.04.

The dollar’s role as a good store of value is “questionable” and the currency has a high degree of risk, said Nobel Prize-winning economist Joseph Stiglitz.

“There is a need for a global reserve system,” Stiglitz, a Columbia University economics professor, said at a conference in Bangkok yesterday. Support from countries like China should ensure orderly discussions on a new reserve system, he added.

Orders for U.S. durable goods, excluding automobiles and aircraft, will rise by 3 percent in July, according to the median forecast of 40 economists in a Bloomberg News survey. This would signal an expansion of manufacturing in the second half of the year.

The Ifo institute in Munich will release its business climate survey, base on a survey of 7,000 executives, on Aug. 26. German business confidence will rise for a fifth month in August, according to the median of 41 forecasts in a Bloomberg News survey.

“The German Ifo survey is the next big market mover,” said Bilal Hafeez, the London-based global head of currency strategy at Deutsche Bank AG, the world’s biggest foreign-exchange trader.