Dollar Falls as Global Economic Optimism Spurs Demand for Risk

Nov. 13 (Bloomberg) -- The dollar declined against most of its 16 major counterparts tracked by Bloomberg as speculation the global economic recovery is gathering momentum encouraged demand for higher-yielding assets.

The U.S. currency dropped against the New Zealand dollar and Norwegian krone as the euro nations emerged in the third quarter from their worst recession since World War II. The yen rose against the euro and dollar as concern eased that Japan may have trouble financing its budget deficit.

“The world economy is picking up steam,” said Folker Hellmeyer, chief analyst in Bremen, Germany, at Bremer Landesbank, in an interview on Bloomberg Television. “Germany, in particular as an export nation, is benefiting.”

The dollar slid 0.3 percent to $1.4895 per euro at 3:01 p.m. in New York, from $1.4850 yesterday. The greenback was down by the same amount this week against Europe’s currency. “Going into the first quarter, I even see more room up toward $1.60, $1.65,” said Hellmeyer, referring to the euro.

New Zealand’s dollar advanced 1.3 percent to 74.24 U.S. cents and Norway’s krone appreciated 1 percent to 5.6111 per dollar on speculation investors will increase carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher. Benchmark interest rates as low as zero in the U.S. make the dollar a favored currency for investors seeking to fund such trades.

Europe’s Growth

Gross domestic product in the euro region increased 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Germany’s GDP expanded 0.7 percent in the third quarter, and France’s growth was 0.3 percent, separate reports showed.

The U.S. trade deficit increased 18 percent to $36.5 billion, the widest level since January, the Commerce Department said today in Washington. Imports surged, swamping a gain in exports, as the economy rebounded.

The yen appreciated 0.8 percent to 89.63 versus the dollar, from 90.37, and strengthened 0.5 percent to 133.49 against the euro, from 134.21.

Japanese government bonds increased, completing their first weekly advance in more than a month and pushing the yield on the 10-year security to 1.34 percent, the lowest since Oct. 19.

Maintaining “the trust of investors in the government bond market is our priority,” Finance Minister Hirohisa Fujii said on Nov. 10. That day, the 10-year bond’s yield reached 1.49 percent, the highest level in almost five months.

Japan’s Debt

“The near-term concern about the fiscal deficit is exaggerated,” said Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “It’s a long- term story, but the move has become overdone in the near term.”

Japan’s public debt, already the largest in the industrialized world, is approaching twice the size of gross domestic product, according to the Organization for Economic Cooperation and Development.

The yen was also supported as Japanese investors repatriated money on “heavy” redemptions of their investment in U.S. fixed-income assets, Hardman said.

President Hu Jintao of China said at the Asia-Pacific Economic Cooperation group summit in Singapore that the world’s most populous nation will take “vigorous” steps to boost household spending and reduce a reliance on investment and exports for economic growth.

Outlook for Yuan

China triggered speculation on Nov. 11 that the yuan may rise when policy makers dropped a pledge from their monetary- policy report to keep the currency “basically” stable.

“The market is looking at appreciation expectations for the yuan again,” said Geoffrey Yu, a currency strategist at UBS AG in London. A stronger yuan will help other Asian nations be more comfortable allowing their own currencies to rise, Yu said.

Eight of 10 major Asian currencies tracked by Bloomberg gained against the dollar in the past three months. The South Korean won was the best performer, rising 6.6 percent to 1,160.32 per dollar.

South Korea, Brazil and Russia are losing the battle among developing nations to reduce gains in their currencies and keep exports competitive.

Deputy Finance Minister Shin Je Yoon of South Korea said yesterday the nation will leave the level of its currency to market forces after adding about $63 billion to its foreign- exchange reserves this year to slow the appreciation of the won.

International Monetary Fund Managing Director Dominique Strauss-Kahn urged Asian nations to let their currencies appreciate as part of the region’s contribution to a more balanced global recovery.

“Many Asian currencies are still undervalued related to those of their major trading partners, while the euro is somewhat overvalued on this basis,” Strauss-Kahn said in text of a Singapore speech today. “The region should not resist a gradual appreciation of its exchange rates, which I consider an important prerequisite for long-term rebalancing.”