Dollar Strengthens as Equities Drop, Short-Term Treasuries Rise

Nov. 21 (Bloomberg) -- The dollar rose against most of its major counterparts and posted its first weekly gain versus the euro in November as investors sold shares and bought short-term Treasuries to guard against losses before year-end.

The yen gained versus the euro as stock indexes in the U.S., Germany and Japan dropped, discouraging demand for riskier assets. The greenback completed its fourth straight weekly loss versus the yen on bets the Federal Reserve, due to release minutes of its Nov. 4 meeting next week, will keep borrowing costs at virtually zero through the first half of 2010.

“The markets have been getting a little tougher,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “The Fed introduced conditionality in its policy, and it will be interesting to see the rationale and reasons for that in the minutes.”

The dollar strengthened 0.3 percent to $1.4862 per euro from $1.4903 on Nov. 13. The 16-nation currency touched $1.4802 yesterday, the lowest level since Nov. 4. The yen appreciated 1.2 percent to 132.09 per euro, from 133.63. The U.S. currency fell 0.9 percent to 88.88 yen, after touching 88.64 on Nov. 19, the lowest level since Oct. 9.

The Fed reiterated at its meeting this month that it will keep the target lending rate at zero to 0.25 percent for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. The minutes are due Nov. 24.

Bank of Japan

The Bank of Japan left its benchmark interest rate unchanged at 0.1 percent at the end of its policy meeting yesterday and raised its monthly assessment, saying the economy is picking up.

“The yen won’t materially sell off until we see a rise in U.S. interest rates,” Adam Cole, London-based global head of currency strategy at Royal Bank of Canada, said in a Bloomberg Television interview.

New Zealand’s dollar slid 3.5 percent to 64.36 yen and Sweden’s krona dropped 1.3 percent to 6.9306 per dollar as the drop in stocks discouraged carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates. Benchmark rates in the U.S. and Japan, among the lowest in the industrialized world, make their currencies popular for funding such transactions.

The Standard & Poor’s 500 Index fell 0.2 percent this week, and the MSCI World Index of shares dropped 1.1 percent. The Nikkei 225 Stock Average slid 2.8 percent, capping its fourth straight weekly loss.

Treasury Yields

Treasury two-year note yields fell yesterday to the lowest level this year on concern the rally in riskier assets has outpaced U.S. growth prospects. Three-month bill rates turned negative on Nov. 19 for the first time since last year’s credit freeze as the 64 percent rally in the S&P 500 from a 12-year low in March pushed valuations to about 22 times its companies’ reported earnings, the highest level since 2002.

“If you’ve been long all these asset classes and all these things that have done well, performed well, it’s the end of the year,” said David Ader, the head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “You do not get fired at the end of a calendar year for booking some profits. Now is not the time when people are going to add to risk.”

Yuan forwards posted their biggest weekly drop in 10 months on speculation China will rebuff international calls for the currency to appreciate. The nation is “passive” on the value of the dollar, the central bank’s Governor Zhou Xiaochuan said at a forum in Beijing today, signaling policy makers aren’t yet prepared to loosen controls on the yuan.

Obama in China

U.S. President Barack Obama urged China during his visit there this week to allow the yuan to appreciate. His Chinese counterpart, Hu Jintao, made no mention of the currency’s link to the greenback in a joint briefing.

“Underlying nationalism in China will work as a headwind because they feel they’re being pressured into it,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at MF Global Ltd. in Chicago. “China will eventually have to revalue, and they will want to revalue.”

The yuan has traded at about 6.83 per dollar since July 2008 after a 21 percent gain in the previous three years. The link of the yuan to the weakening dollar has pushed the Chinese currency down 16 percent versus the euro and 8 percent against the yen over the past year, adding to pressure from China’s export competitors to let the yuan appreciate.

Fed Chairman Ben S. Bernanke said in a New York speech this week that the central bank is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

The South African rand was the worst performer against the dollar among emerging-market currencies, dropping 2.5 percent to 7.6117 as labor unions, politicians and the central bank raised concern that its 25 percent rally this year was harming the economy. Reserve Bank Governor Gill Marcus said this week that the rand’s strength was “of concern.”