Dollar Depreciates on Speculation Banking Crisis May Be Easing

March 11 (Bloomberg) -- The dollar weakened to the lowest level against the euro in two weeks as speculation the banking crisis may be easing reduced demand for the greenback as a refuge. Norway’s krone gained and global stocks advanced, posting the first two-day climb in a month. The euro rose against the Swiss franc as demand for higher-yielding assets outweighed a report showing factory orders in Germany slid in January four times more than economists forecast. “People are spotting some glimmer of hope and trying to make the best of a very bad situation,” said Brian Dolan, chief currency strategist in Bedminster, New Jersey at FOREX.com, a unit of online currency trading firm Gain Capital Group. “Be prepared to exit quickly. This is not a buy-and-hold market.” The dollar fell 1.3 percent to $1.2845 per euro at 4:23 p.m. in New York, from $1.2682 yesterday. It touched 1.2864, the lowest since Feb. 25. The yen rose 0.2 percent to 124.89 per euro, after declining as much as 0.5 percent, from 125.13. The yen rose 1.5 percent to 97.22 per dollar, from 98.67 yesterday. The euro gained 0.6 percent to 1.4805 Swiss francs, from 1.472 yesterday. German manufacturing orders plunged in January 38 percent from a year earlier, the biggest drop since data for a reunified Germany started in 1991, the Economy Ministry in Berlin said today. The Dollar Index, which the ICE uses to track the currency’s performance against those of six major U.S. trading partners, fell 1.2 percent to 87.868, from 88.927 yesterday. The index rose to 89.624 on March 4, the strongest since April 2006. The cost of borrowing in dollars remained near a two-month high amid economic turmoil. Default Risk Falls The cost of default protection on banks including Citigroup Inc. and Bank of America Corp. fell for a second day. Credit- default swaps on the two financial institutions declined to the lowest in a week as speculation eased that $1.23 trillion in asset writedowns and losses will force losses on bondholders. Credit-default swaps on New York-based Citigroup fell 15 basis points, or 0.15 percentage point, to 550 basis points, according to broker Phoenix Partners Group. Contracts on Charlotte, North Carolina-based Bank of America fell 35 to 305. The swaps pay the buyer face value if a company defaults. The MSCI World Index gained 1 percent after rising as much as 2 percent. The Standard & Poor’s 500 Index was up 0.2 percent after advancing as much as 1.7 percent. Won Rises South Korea’s won rose for a fourth day, the longest stretch this year, as concern eased that the tightening of global credit markets may starve the country of dollar funding. The nation’s currency advanced 2.7 percent to 1,471 per dollar, according to Seoul Money Brokerage Services Ltd., as stocks in Asia climbed. “There are expectations that China’s efforts to bolster growth will succeed and that Korea stands to be among the first countries to benefit,” Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co., wrote in a research note today. Norway’s krone is the only one of the 16 most actively traded currencies beating the dollar this year, rising 1.1 percent to 6.8778. Against the euro, it gained 9.8 percent to 8.8442. The krone and the Swedish krona “continue to lead the way for this week’s trade as the outperformance” against the dollar and the euro, Niall O’Connor, New York-based currency technical analyst at JPMorgan Chase & Co., wrote in a research note to clients. The yen rose versus the dollar for a second day. It failed to challenge the 100-per-dollar level that last seen in November. The yen touched 99.68 on March 5, the strongest in four months. ‘Tremendous Run’ “Overall dollar-yen has had a tremendous run, and there’s an overall flight out of U.S. dollars today,” said Kathy Lien, director of currency research at GFT, an online currency trading firm in New York. Expectations for the yen to strengthen in the next six months plunged after Japan’s economy contracted last quarter by the most in more than three decades, a survey of Bloomberg users showed. Participants are the least bullish on the yen since August, as an index measuring sentiment plunged 26 percent this month, according to 3,637 respondents from Paris to Tokyo in the Bloomberg Professional Global Confidence Index. Swiss users were the most optimistic on the franc since the surveys started. The dollar gained against all 16 major currencies except the Swiss franc in the past month as the deepening global recession boosted demand for the world’s reserve currencies. European Funding Demand The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans held steady at 1.33 percent, near the highest level since Jan. 8 and up from the low this year of 1.08 percent on Jan. 14, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, increased to near the most since Jan. 9. European investors’ demand for dollars for funding has increased in the past two months, cross-currency basis swaps between euros and dollars showed. The rate on a one-year cross-currency basis swap between euros and dollars was minus 51.7 basis points, compared with minus 27.6 basis points two months ago. A negative swap rate signals that investors are willing to receive reduced euro interest payments to obtain dollar-based financing. UBS AG, Switzerland’s biggest bank, posted a 20.9 billion Swiss franc ($18 billion) loss for 2008, more than initially reported, and said it remains “extremely cautious” about the outlook for this year. “The banking problems in the U.S. may be over, but I am skeptical that the problems with European banks are over,” said Gabriel Borenstein, managing director of global fixed income in New York at Jesup & Lamont Securities, a brokerage and investment banking firm. “The threat surfacing outside the U.S. is bullish for the dollar.” To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net Last Updated: March 11, 2009 16:28 EDT

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