The Dollar declined to the lowest level this year against six major U.S. trading partners as optimism that a global recovery is near reduced demand for the greenback as a refuge.
The Swedish krona advanced against the euro to the strongest level since November after a government report yesterday showed the contraction in the Scandinavian country slowed last quarter. Federal Reserve Chairman Ben S. Bernanke told Congress last month that policy makers will maintain a “highly accommodative” monetary policy for an extended period.
“It’s clear that the economy is recovering,” said Adam Boyton, a strategist in New York at Deutsche Bank AG, the world’s largest currency trader. “Ben Bernanke is making it clear that although he has an exit strategy, he’s not going to use it any time soon. That’s probably been a small negative for the dollar.”
The dollar fell 1.6 percent last month to $1.4257 per euro in New York, from $1.4033 on June 30. The U.S. currency fell 1.7 percent to 94.68 yen, from 96.36 yen a month earlier. The Japanese currency gained 0.2 percent this month to 134.99 per euro, the first advance in three months.
The Dollar Index, which the ICE futures exchange uses to track the currency against counterparts including the yen, pound and Swedish krona, touched 78.22 yesterday, the lowest since Dec. 18. The index dropped 2.3 percent in July.
The dollar declined 1.3 percent versus the euro yesterday, the biggest loss in a month, as a report showing the U.S. economy shrank less than economists forecast added to signs the global recession may be ending, encouraging investors to buy higher-yielding assets overseas.
‘Some Restraint’
U.S. gross domestic product contracted at a less-than- projected 1 percent annual rate after shrinking a revised 6.4 percent in the prior three months, the most in 27 years, the Commerce Department said. Inventories dropped at a record $141.1 billion annual pace, after a $113.9 billion decline.
“The inventories data shows stunning drawdowns in both Q1 and Q2,” wrote Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut. “This bodes very well for H2 GDP data since the change of inventories should be very positive. Obviously there will be some restraint to this trade because of month-end flows, but I expect players will buy risk trades again early next week.”
‘Signs of Stabilization’
Bernanke told the House Financial Services Committee on July 21 that while the economy is showing “tentative signs of stabilization,” the central bank intends to keep interest rates low. The Fed’s benchmark target rate for overnight loans has been set at a range of zero and 0.25 percent since December.
A government report next week will probably show the U.S. lost 325,000 jobs in July, after reducing 467,000 the previous month, according to the median forecast of 56 economists surveyed by News. The report is due Aug. 7.
The Dow Jones Industrial Average index advanced 8.6 percent in July, the biggest monthly gain since 2002.
The Canadian dollar was the best performer among the major currencies, rising 7.9 percent versus the greenback, as stock gains and higher crude oil prices burnished the appeal of currencies linked to growth.
Canada’s currency touched C$1.075 against the greenback on July 28, the strongest level since Oct. 3, as crude oil reached $69 a barrel. Commodities, such as oil and gold, account for more than half of Canada’s exports. The currency ended the month at C$1.078 after a government report showed the nation’s economy shrank a more-than-forecast 0.5 percent in May.
‘Ahead of Fundamentals’
“There’s a disconnect between market optimism and numbers on the ground,” said Steven Englander, chief U.S. currency strategist at Barclays Plc in New York. “The Canadian dollar is running ahead of fundamentals. We had some pretty nasty number out of Canada recently.”
The Canadian currency will decline to C$1.13 in a month, according to Barclays.
The Swedish krona touched 10.237 per euro yesterday, the strongest since Dec. 1, after Statistics Sweden said the country’s gross domestic product contracted an annual, work-day adjusted 6.2 percent, from a decline of 6.5 percent in the previous quarter.
The krona gained 5.4 percent against the euro last month and 7.1 percent against the dollar. It was the second best performer among the 16 major currencies after the Canadian dollar, which rose 6 percent against the euro in July.
Moving Sideways
The euro-dollar exchange rate swung less than 3 cents above and below $1.40 in July. Implied volatility on seven major currencies against the dollar dropped to 12.73 yesterday, the lowest since October, indicating traders expect less price fluctuation in the foreign-exchange market in coming months.
“We are moving sideways until September when gradual improvement in macro data adds to fresh momentum for dollar shorts,” said Mike Moran, a senior currency strategist at Standard Chartered in New York. A short position is a bet a currency will decline.
Investors should buy the U.S. currency against the yen, with a target above 105 per dollar, as Japan’s trade and investment flows deteriorates, Goldman Sachs Group Inc. said yesterday in an e-mailed note.
The yen is the most overvalued currency in the Group of 10 major currencies, and “neutral” market positioning allows investors to add more bets against the Japanese currency, according to Goldman. Trade and investment flows to Japan have turned from a surplus of 6 percent of its GDP, to a deficit of 5 percent of the economy, according to Goldman.
“We could be getting closer to the tipping point for the yen,” Mark Tan, a Goldman analyst in New York wrote.