Dollar Strengthens for Second Day Against Euro as Stocks Slide

Oct. 21 (Bloomberg) -- The dollar gained for a second day versus the euro as regional stocks extended losses in U.S. shares, sapping demand for higher-yielding assets.

The euro also retreated from a 14-month high against the dollar on speculation European policy makers will today reiterate their concerns that the currency’s gains are hurting the region’s economic recovery. The New Zealand dollar erased declines as Governor Alan Bollard said strength in the so-called kiwi isn’t an impediment to the central bank raising rates.

“The stock market continues to dominate the currency market and affect its direction,” said Toshiya Yamauchi, a manager of the foreign-exchange margin-trading department at Ueda Harlow Ltd. in Tokyo. “We need to watch for a possible reversal of risk trade or short positions on the dollar.” A short position is a bet that an asset will fall.

The dollar traded at $1.4921 per euro at 9:53 a.m. in Tokyo from $1.4945 yesterday in New York, when it touched $1.4994, the weakest level since August 2008. The greenback was at 90.91 yen from 90.78 yen. The euro bought 135.68 yen from 135.66.

New Zealand’s dollar was at 74.93 U.S. cents from 74.96 cents yesterday after earlier falling as much as 0.4 percent. It yesterday touched 75.76, the most since July 2008. It bought 68.03 yen from 68.04.

The MSCI Asia Pacific Index of regional shares slid 0.4 percent and the Nikkei 225 Stock Average lost 0.1 percent. The Standard & Poor’s 500 Index lost 0.6 percent yesterday in New York, retreating from a one-year high.

Stocks Decline

Stocks fell after the U.S. Commerce Department said housing starts rose 0.5 percent to an annual rate of 590,000 in September from a 587,000 pace in August. Economists had forecast starts increased to a 610,000 rate. Prices paid to factories, farmers and other producers fell 0.6 percent, the second drop in three months, the Labor Department said.

Demand for the euro fell after European Central Bank President Jean-Claude Trichet said Oct. 19 after a meeting of euro-area finance ministers in Luxembourg that “excessive volatility” in currencies is “bad for economic development.”

Henri Guaino, an aide to French President Nicolas Sarkozy, also said yesterday a euro exchange rate of $1.50 “is a disaster for the European economy and manufacturing sector.”

“European officials are expressing worry that the euro’s appreciation is making things difficult for their economy,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is causing the euro to undergo a downward correction.”

Sarkozy will hold a weekly cabinet meeting at 10 a.m. in Paris, and European Commission President Jose Barroso will speak to the European Parliament at 9 a.m. in Strasbourg, France.

The euro has strengthened 15 percent versus the dollar in the past 6 months, making the region’s exports more expensive to overseas buyers.

IFO

Losses in the euro may be limited before a report this week forecast to show business confidence in Germany improved, adding to signs that the recovery is gaining momentum.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, climbed to 92 in October from 91.3 the previous month, according a survey of economists. The Munich-based institute will release the report Oct. 23.

The kiwi trimmed earlier losses after Governor Bollard told Radio New Zealand the currency’s gains are being driven by a weak U.S. dollar and money markets. He said on Sept. 10 he didn’t expect to raise rates until “the latter part of 2010.”

Traders are betting that New Zealand’s central bank will raise its benchmark rate by 2 percentage points over 12 months, according to a Credit Suisse Group AG index based on swaps.

Benchmark interest rates are 2.5 percent in New Zealand and 3.25 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.