The euro rose to a 15-month high against the dollar as the European Central Bank increased interest rates for the first time since the financial crisis and amid concern the U.S. is debasing its currency.
The dollar fell for a second week versus the euro as U.S. lawmakers remained in a stalemate on a federal budget and the Federal Reserve plans to buy Treasuries through June to support faster economic growth. The yen weakened as the Bank of Japan added to economic stimulus to help the nation’s economy recover from last month’s earthquake. Higher yielding currencies, such as the Australian dollar, strengthened as signs of global growth boosted demand for riskier assets.
“The underlying demand for the euro, because of the continued dislike for the dollar, is unrelenting,” said Ray Attrill, a senior foreign exchange strategist at BNP Paribas SA in New York. “The risk is that we’ll see U.S. interest rates trending lower at the same time that we get more confidence about further rate hikes in the rest of the world.”
The euro rose 1.7 percent to $1.4483 in New York, from $1.4237 April 1. It touched $1.4444, the highest level since January 2010. The yen declined 2.6 percent to 122.76 per euro, reaching 123.08, the weakest since May 2010. Japan’s currency lost 0.8 percent to 84.76 per dollar.
ECB Acts
The ECB raised its key rate by 25 basis points to 1.25 percent April 7. The increase was forecast by all the economists in a Bloomberg News survey.
“We did not decide that it was the first of a series of interest-rate increases,” ECB President Jean-Claude Trichet said during a press conference in Frankfurt. “We will continue to do in the future” what is appropriate “to ensure price stability,” he said.
The rate increase came less than 24 hours after Portugal said it would request financial aid from the European Commission, becoming the third euro-zone country to do so after Greece and Ireland. A rescue package for Portugal may be worth as much as 75 billion euros ($107 billion), two European officials with knowledge of the situation said.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback versus the currencies of six major trading partners, including the pound and Canadian dollar, sank to as low as 74.838, the least since December 2009. It lost 1.3 percent to 74.855, from 75.833 last week.
Spending Measures
Congress failed to reach an agreement on spending measures for the 2011 fiscal year as of 5 p.m. New York time. The deadline to reach a resolution was midnight.
The ECB’s decision to raise its main rate came as the central banks of other developed nations, including the U.S. and Japan, keep borrowing costs near zero to support their economies as they recover from the financial crisis. The Fed isn’t expected to raise its target funds rate until the first quarter of 2012 and the Bank of Japan will probably keep borrowing costs on hold for the next 12 months, the median estimates in two Bloomberg surveys show.
The U.S. central bank has purchased $512 billion of Treasuries since November as part of its plan to acquire $600 billion by June.
“Improved risk sentiment on the back of the global recovery is pushing the euro higher against the yen and dollar, especially now the market is convinced there will be further rate increases by the ECB,” said Hitoshi Asaoka, senior strategist at Mizuho Trust & Banking Co. in Tokyo, a unit of Japan’s second-largest bank.
Weak Yen
The yen dropped for a fourth straight week versus the euro, the longest losing streak in 20 months, on speculation the BOJ will continue with accommodative monetary policy to help its economy recover from a record earthquake on March 11. The BOJ April 7 unveiled a 1 trillion yen ($11.8 billion), one-year loan program to companies affected by the quake and tsunami as board members downgraded their economic assessment for the first time since October.
A magnitude-7.1 aftershock, one of the strongest since the devastating earthquake March 11, struck Japan April 7 215 miles northeast of Tokyo, the U.S. Geological Survey reported on its website. None of the nuclear facilities reported distress, according to official and news media reports.
Brazil’s real posted the best performance among the 16 major currencies after the government enacted measures to curb its rally that were weaker than some investors expected, and Finance Minister Guido Mantega said long-term appreciation of the currency is “inevitable.”
The real rose 2.4 percent to 1.5689 per dollar. The currency has gained 48 percent since the end of 2008.
Brazil Tax
The government has changed tax rules three times since March 29 in an effort to slow the two-year surge in the real that’s crimping exporters’ profits. Mantega said April 6 the currency’s strength was, to some extent, “inevitable” due to the economy’s growth as he announced the government was broadening the scope of a 6 percent tax on foreign borrowing to include loans with maturities of up to two years from one year.
Australia’s dollar rose for a third week versus the greenback after statistics showed the unemployment rate fell to 4.9 percent in March from 5 percent the previous month. Employers added 37,800 workers in March from the previous month, the statistics bureau said.
Australia’s dollar gained 1.7 percent to $1.0564, reaching $1.0584, the strongest since it was freely floated in 1983.
Source: Bloomberg By
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