Dollar skyrockets as bailout spurs demand

Bloomberg

The dollar reached the highest since April 2006 against the currencies of six U.S. trading partners as investors sought safety after American International Group got more government support and Federal Reserve Chairman Ben S. Bernanke said the banking system is not yet stabilized.

Japan’s currency declined for a sixth week against the dollar, the longest losing streak since June 2007, on concern the nation’s recession will deepen. The dollar pared gains yesterday on speculation U.S. job losses began to level off in February, encouraging some demand for higher-yielding assets.

"We saw a bounce in risk appetite, but if the dollar was truly out of favor, you’d see the dollar selling against the euro and also the yen," said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. "That hasn’t happened. The safe-haven status of the dollar is unassailable."

The dollar rose 0.1 percent to $1.2653 per euro from $1.2669 on Feb. 27. The yen declined 0.7 percent to 98.25 per dollar last week from 97.57. Japan’s currency lost 0.6 percent to 124.34 per euro from 123.61. The Dollar Index, which the ICE uses to track the greenback’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, increased to 89.624 on March 4, the highest level since April 2006, before ending the week up 0.6 percent.

A weaker pound

The pound fell for a second week against the dollar, dropping 1.6 percent to $1.4094 as the Bank of England said it will pump cash into the economy by purchasing as much as 150 billion pounds ($211 billion) in government and corporate bonds, a policy known as quantitative easing. The BoE’s main rate was cut to 0.5 percent.

Sterling depreciated 27 percent against the dollar and 23 percent versus the euro last year as the economy faced recession.

"A move by the Bank of England to implement quantitative easing should over time add to the downward pressure on the pound," Deutsche Bank strategists John Horner and Adam Boyton wrote in a note to clients last week.

The same day as the BoE’s decision, European Central Bank President Jean-Claude Trichet signaled policy makers will reduce borrowing costs further to combat the recession after lowering the main refinancing rate to 1.5 percent, the lowest level since the euro debuted in 1999.

Japan’s currency dropped 1.5 percent to 84.83 versus the Swiss franc and 1.3 percent to 63.13 against the Australian dollar as the world’s second-largest economy weakened. The yen lost 6.3 percent against the dollar since Feb. 16, when the Japanese government said the economy shrank an annualized 12.7 percent last quarter, the biggest contraction since 1974. The government will need to revise its gross domestic product forecast soon, Finance Minister Kaoru Yosano told reporters in Tokyo on Friday.

The dollar and yen dropped yesterday against the euro on speculation the rate of U.S. job losses slowed, reducing demand for the currencies as havens.

"Markets were bracing themselves for a bigger reduction in payrolls," said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. "More risk-aversion positions have to be unwound."

U.S. employers eliminated 651,000 jobs last month, following a reduction of 655,000 in January. The jobless rate increased to 8.1 percent.

Policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other measures, Bernanke said before the Senate Budget Committee on March 3.

AIG, the U..S. insurer, a day earlier posted the worst loss by any U.S. corporation and said it will get as much as $30 billion in new aid.