Dollar Trades Near Lowest in 14 Months as Risk Appetite Rises

Oct. 20 (Bloomberg) -- The dollar traded near the lowest in more than a year against the euro as signs the global economy is recovering boosted demand for higher-yielding assets. Australia’s dollar touched a 14-month high after its central bank said keeping borrowing costs low was no longer necessary.

The euro advanced for a ninth day against the yen as Asian stocks continued a global rally and before reports this week economists said will show the U.S. housing market and German business confidence improved, damping demand for Japan’s currency as a shelter from the recession.

“A mood of euphoria is at work as prospects improve for corporate profits and the economy,” said Mitsuru Saito, Tokyo- based chief economist at Tokai Tokyo Securities Co. “Given also the likelihood that the Federal Reserve will maintain its accommodative monetary stance, riskier assets will continue to fare well at the expense of funding currencies.”

The dollar traded at $1.4976 per euro as of 10:19 a.m. in Tokyo from $1.4965 in New York yesterday after earlier declining to $1.4981, the weakest since August 2008. The U.S. currency bought 90.47 yen from 90.55. The euro was at 135.48 yen from 135.51 yen.

Australia’s currency was at 92.83 U.S. cents from 92.92 cents yesterday. It earlier climbed to 93.11 cents, the highest since August 2008. New Zealand’s dollar traded at 75.42 U.S. cents after earlier touching 75.76 cents, the strongest since July 2008.

Benchmark Rates

A “very expansionary setting of policy was no longer necessary, and possibly imprudent,” policy makers said in minutes of their Oct. 6 meeting, released today in Sydney. The risks in waiting to raise borrowing costs “had increased.”

Central bank Governor Glenn Stevens and his board raised the benchmark rate by a quarter percentage point to 3.25 percent and signaled further increases as soon as next month.

Benchmark interest rates of 0.1 percent in Japan and as low as zero in the U.S. make the yen and dollar favorite funding currencies for so-called carry trades, in which investors borrow where interest rates are relatively low and buy assets in nations where returns are higher. The risk in such trades is that currency-market moves can erase profits.

Stocks Advance

The MSCI Asia Pacific Index of regional shares advanced 0.9 percent and the Nikkei 225 Stock Average gained 1 percent. The Dow Jones Industrial Average rose 1 percent yesterday.

Stocks advanced globally on improved prospects for U.S. corporate earnings. Analysts surveyed by Bloomberg estimate profits for companies in the Standard & Poor’s 500 Index will rise 65 percent in the last three months of the year after falling for nine straight quarters, the longest streak since the Great Depression.

Earnings at U.S. companies will probably exceed analysts’ third-quarter estimates, extending a rally in stocks to year- end, Nomura Holdings Inc. wrote in a note dated Oct. 16. Thirty- four of the 41 companies in the S&P 500 that reported since Oct. 7 surpassed analysts’ projections, according to Bloomberg data.

U.S. housing starts rose to an annual rate of 610,000 in September from 598,000 in August, according to a Bloomberg News survey of economists before the Commerce Department report today. The Ifo institute’s business climate index, based on a survey of 7,000 executives, probably rose to 92 in October from 91.3 the previous month, according to a separate survey. The Munich-based institute will release the report on Oct. 23.

Fed Signals

Demand for the dollar may also weaken after the Federal Reserve signaled in a statement yesterday that it will keep borrowing costs down while assessing ways to drain money from the banking system.

The Fed said it’s working with market participants to assess the use of reverse repurchase agreements to withdraw some of the record amounts of cash it added to the financial system.

“This work is a matter of prudent advance planning by the Federal Reserve, and no inference should be drawn about the timing of monetary-policy tightening,” the statement said.

Losses in the dollar were tempered after French Finance Minister Christine Lagarde repeated calls by France and other euro-area countries for a strong dollar, saying ministers agreed to take a common position at meetings in Luxembourg.

“We want a strong dollar, we need a strong dollar,” Lagarde told journalists after the meeting. “We must remain disciplined” on our message, she said.

Lagarde also said that euro-area countries agreed to begin ending their economic stimulus programs in 2011, provided “conditions stabilize.”

Gains in the euro were limited on speculation the 16- nation region’s finance ministers will reiterate concern over the European currency’s recent gains at a two-day meeting that ends today.

Euro ‘Problem’

Luxembourg Treasury Minister Jean-Claude Juncker, who is leading the meeting of euro-area finance chiefs, said yesterday the ministers “discussed exchange rates extensively,” adding that “it’s a problem which worries us.” Juncker and European Central Bank President Jean-Claude Trichet will travel to China with European Union Monetary Affairs Commissioner Joaquin Almunia before the end of the year to discuss currencies, Juncker said.

“Policy makers may express worries that the euro is too strong, especially against China’s renminbi,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “Further euro appreciation will likely hurt the euro- zone’s exports more.”

The euro has gained 16 percent against the dollar and the renminbi in the past six months, making the region’s exports more expensive to overseas buyers and threatening the recovery from the worst recession since World War II.