Deep concern U.S. bank losses will derail global economic recovery strengthens USD

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Dollar Advances as Bank Losses, Stock Drop Spur Safety Demand
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By Yasuhiko Seki and Ron Harui

Oct. 27 (Bloomberg) -- The dollar gained for a third day against the euro and reached a one-month high versus the yen on concern U.S. bank losses will derail the global economic recovery, sapping demand for higher-yielding assets.

The dollar traded near the highest in almost one month against the yen on speculation U.S. lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will have to sell shares to pay back its government bailout. Australia’s dollar traded near the lowest in a week before a report tomorrow that may show consumer price gains slowed, reducing pressure on the central bank to raise interest rates.

“There are lingering downside risks to the U.S. housing sector and banking industry,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “We may need to carefully reassess the sustainability of a rally in risk assets funded by the dollar.”

The dollar traded at $1.4853 per euro at 9:16 a.m. in Tokyo from $1.4876 yesterday in New York. The greenback reached $1.5063 yesterday, the weakest level since August 2008. The dollar advanced to 92.29 yen from 92.19 yen yesterday, after earlier today reaching 92.32 yen, the strongest level since Sept. 21. The euro was at 137.07 yen from 137.10 yen.

Australia’s currency was at 91.58 U.S. cents from 91.62 cents in New York yesterday when it touched 91.26 cents, the weakest since Oct. 19. Australia’s annual consumer price inflation slowed to 1.2 percent in the third quarter from 1.5 percent, according to the median forecast of 20 economists in a Bloomberg survey. The government will release the data tomorrow.

The Nikkei 225 Stock Average fell 0.8 percent and the MSCI Asia Pacific Index of regional shares declined 0.7 percent today. The Standard & Poor’s 500 Index slid 1.2 percent in New York yesterday.

Stocks Tumble

U.S. stocks fell after Senator Bill Nelson said senate leaders are negotiating to extend and gradually reduce the housing tax credit through 2010. The credit was set to expire at the end of November.

Bank shares fell 3.3 percent collectively, the steepest decline in the S&P 500 among 24 industries, after Rochdale Securities LLC　analyst Dick Bove downgraded Fifth Third Bancorp, SunTrust Banks Inc. and U.S. Bancorp on concern loan losses will remain high.

“The government apparently wants the bank to raise $45 billion in the market from a new capital offering before it will let the bank redeem the TARP preferreds,” Bove wrote in a note on Bank of America dated Oct. 23, referring to the preferred stock purchased by the government as part of the Troubled Asset Relief Program.

“Selling more stock would meaningfully harm Bank of America’s shareholders,” he wrote.

Federal Deposit Insurance Corp. Chairman Sheila Bair said yesterday that banks continue to face “serious challenges.”

Bair also said tapping a Treasury Department credit line to replenish funds depleted by a surge of bank failures would harm her agency and the banking industry. She made the comments yesterday in a speech at an American Bankers Association convention in Chicago.

Fed’s Policy

The dollar traded near a five-week high against the yen after the Wall Street Journal this week said Fed officials are likely to discuss next week how and when to signal the possibility of higher U.S. rates.

At the previous meeting on Sept. 23, the Fed’s policy making Open Market Committee agreed to keep the benchmark rate in a range of zero to 0.25 percent. In a statement following the gathering they said economic conditions will warrant keeping the rate low “for an extended period.”

“Yields in the U.S., particularly in the long end, are rising as the Wall Street Journal reported the Fed may change the ‘for an extended period’ phrase in the statement at the November meeting,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France’s third- largest bank. “This is being perceived as the first step toward an exit strategy, and is likely to lead to dollar-buying.”

Fed policy makers are contemplating the best way to let the market know that a period of record-low rates will draw to an end, the Wall Street Journal said on Oct. 24, without naming a source. The issue may be “on the table” when the Federal Open Market Committee meets Nov. 3-4.

The yield on the 10-year Treasury note increased eight basis points, or 0.08 percentage point, to 3.57 percent in New York yesterday, according to BGCantor Market Data. The yield touched 3.58 percent, the highest level since Aug. 24.

Federal Reserve will raise the policy rate by to 0.5 percentage points in the second quarter 2010, while the Bank of Japan is forecast to maintain interest rates on hold at least until the first quarter 2011, according to a Bloomberg News survey of economists.

Kiwi Falls

New Zealand’s dollar, known as kiwi, fell to the lowest level in almost one week against the U.S. dollar after New Zealand Prime Minister John Key said his country’s central bank is unlikely to raise interest rates from a record low this year as inflation appears to be contained.

“The very high exchange rate is helping offset any imported inflation concerns,” Key said in an interview yesterday in Kuala Lumpur. “I would personally be surprised if they raise rates in 2009.”

The Reserve Bank of New Zealand, which acts independently of the government, will announce its next rates decision on Oct. 29. Consumer prices rose 1.3 percent in the third quarter, within the bank’s 1 percent to 3 percent targeted band. Key, a former foreign exchange trader with Merrill Lynch & Co., said the country’s base rate is already “well above” most of its trading partners.

Benchmark interest rates are 2.5 percent in New Zealand and 3.25 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets and driving up their currencies. Key said the New Zealand dollar, which rose to a 15-month high of 76.35 cents last week, is too strong.

New Zealand’s dollar fetched 74.60 U.S. cents from 74.77 in New York yesterday when it dropped as low as 74.53, the least since Oct. 20.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: October 26, 2009 20:22 EDT

 

Bloomie is soooo full of sh!t They had another article out there on how the dollar had lost against the Euro...and how commodities were dropping as a result. Now I ask any sane human: If the dollar is losing value...how can the metals (gold, silver, platinum, etc.) go DOWN in price...yet, that is exactly what was happening. Price manipulation plain and simple!!!

-gastropod