Tuesday, May 26, 2009

Dollar Gains as North Korean Tests Spur Demand for Safety

By Anna Rascouet and Yasuhiko Seki

May 26 (Bloomberg) -- The dollar and yen rose against the euro on increased safety demand as Yonhap News reported North Korea carried out a missile experiment a day after conducting a nuclear test that drew international condemnation.

The U.S. currency advanced versus all of its major counterparts after the news agency said Kim Jong Il’s government test-fired two missiles. The euro fell for the first time in seven days against the dollar after Britain’s Daily Telegraph cited a German banking regulator as saying bad debt at the nation’s biggest lenders may increase.

“The market is still digesting the news from North Korea,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “The dollar is holding up, and the yen is also having reasonable gains. The defining factor is broad risk metrics.”

The euro fell 0.7 percent to $1.3918 at 9:04 a.m. in New York, from $1.4017 yesterday. The 16-nation currency depreciated 0.9 percent to 131.70 yen from 132.92. The dollar slid 0.2 percent to 94.60 yen from 94.83.

The dollar remained lower against the yen after a report showed home prices in 20 major metropolitan areas fell in March more than economists forecast. The S&P/Case-Shiller home-price index dropped 18.7 percent from a year earlier following a similar drop in February. The median forecast of 26 economists surveyed by Bloomberg was for an 18.3 percent decrease.

Norway’s krone fell against all of the 16 most actively traded currencies tracked by Bloomberg as oil prices fell and the central bank said the country’s financial institutions need to keep building up capital to weather the financial crisis.

The krone declined as much as 1.2 percent to 8.9780 per euro, its weakest level since March 31, from 8.8694 yesterday. It dropped as much as 2.2 percent against the dollar before declining 1.8 percent to 6.4430.

South Korea’s Won

South Korea’s won lost 1.1 percent to 1,262.88 against the dollar as the nation’s benchmark stock index slumped for a fourth day after Yonhap reported North Korea was preparing further nuclear tests.

“This kind of news may trigger a knee-jerk reaction among those short-term players who wanted to buy Asian currencies,” said Taisuke Tanaka, managing director and foreign-exchange strategist in Tokyo at Nomura Securities Co., a unit of Japan’s largest securities broker. “But given the fact that most Asian countries enjoy huge current-account surpluses, this type of event won’t change the overall international capital flow.”

The euro slid versus the dollar as the Telegraph quoted Jochen Sanio, president of the German regulator BaFin, as saying debt levels of banks will blow up “like a grenade” unless they participate in the government’s bad-bank plan.

German Debt

“The report over the German debt situation isn’t helping sentiment toward the euro,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. The comments sound “fairly dire.”

German banks have 200 billion euros ($280 billion) of bad debt, Sanio said last week, according to the Telegraph. Write- offs may reach 816 billion euros, the newspaper reported, citing an internal memo from the regulator’s office. In an interview with Bloomberg News last week, Sanio said Germany is “more than able” to cope with the 200 billion euros of toxic assets that its banks still hold.

Government bond sales this week may renew concern that a record supply of Treasuries will jeopardize the U.S.’s AAA credit rating, analysts said.

Ten-year Treasuries fell the most since June 2008 last week as the U.S. prepared to resume debt auctions after a two-week pause. The U.S. will increase debt sales to $3.25 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., as President Barack Obama borrows record amounts to try to snap the recession in at least 50 years.

Standard & Poor’s lowered its outlook on the U.K.’s AAA credit rating on May 21 to “negative” from “stable,” raising concern that the same may happen to the world’s biggest economy.

“Given growing concerns about U.S. creditworthiness, capital outflows from the dollar-denominated assets may gain further momentum,” said Kengo Suzuki, manager of the foreign bond trading department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group.

Rising debt levels may jeopardize the AAA credit rating of the U.S. in the next three years, New York University economist Nouriel Roubini told Il Sole 24 Ore in an interview. “The situation may become risky in two, three years’ time,” Roubini told Sole. “The evolution of the crisis requires paying attention to this matter too.”

Australian Dollar

The Australian dollar fell for a second day, losing 0.9 percent to 77.54 U.S. cents and paring a gain from a five-year low of 60.09 cents reached in October to 29 percent.

Analysts are raising forecasts for the Australian dollar faster than any other major currency on optimism for a global economic recovery.

The median year-end Aussie forecast in monthly Bloomberg surveys rose 14 percent this year, the biggest increase among major currencies against the dollar, and is now 3 cents shy of the current price, half the gap in January. Strategists at BNP Paribas SA, Wells Fargo & Co. and 21 other companies raised estimates in May on speculation China’s demand for Australian exports, from iron ore to wool, will rebound.

“The bears are throwing in the towel, and the Aussie is undervalued,” said Paresh Upadhyaya, who helps manage $21 billion in currency as a Putnam Investments senior vice president in Boston.

Source Bloomberg.com