Friday, April 18, 2008

Dollar Rises Versus Euro on Bets Firms to Weather Credit Losses

April 18 (Bloomberg) -- The dollar rose the most against the euro in more than two weeks after Citigroup Inc.'s first- quarter results fueled speculation that financial firms will weather credit market losses.

The yen fell versus all of the major currencies, dropping more than 2 percent against the South African rand and British pound, as investors increased purchases of higher-yielding assets funded in Japan. The dollar was headed for its biggest weekly advance against the yen since 1999 as yields on two-year Treasury notes reached a 2 1/2-month high.

``Citi's report is a bit of a relief in the sense that things are not getting worse,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``Risk reduction is in favor of the dollar and against the yen.''

The dollar rose 1 percent to $1.5747 per euro at 12:19 p.m. in New York, from $1.5908 yesterday. The U.S. currency increased 2 percent to 104.54 yen, from 102.48 yesterday. It touched 104.33 yen, the highest level since Feb. 29. The euro rose 1 percent to 164.61 per yen, from 163.03 yesterday. It touched 164.68, the highest since Dec. 31.

The greenback is headed for a 0.4 percent increase against the euro this week after reaching the all-time low of $1.5983 yesterday. The dollar faces a weekly advance of 3.5 percent against the yen, the biggest gain since February 1999. The yen is down 3.2 percent against the euro this week, the largest drop since the week ended Aug. 24.

Stronger Pound

The pound appreciated 1.3 percent this week to within a cent of $2 on speculation the Bank of England may take mortgages off lenders' balance sheets. Sterling is up 1.9 percent this week to 79.05 pence per euro after touching the all-time low of 80.99 pence on April 16.

The yen fell 2.5 percent versus South Africa's rand and 2.2 percent against the pound as a gain in U.S. stocks encouraged investors to resume carry trades, in which they get funds in a country with low borrowing costs and invest where returns are higher. Japan's 0.5 percent target lending rate, the lowest among developed nations, compares with 11.5 percent in South Africa and 5 percent in the U.K.

Among the major currencies, the dollar posted its biggest gain against the Swiss franc as traders moved away from a currency regarded as a haven in times of turmoil. The dollar rose 2 percent to 1.0253 against the Swiss franc.

Australia's dollar was headed for the fourth weekly advance against its U.S. counterpart, the longest winning streak since October, as investors resumed carry trades. It rose 0.2 percent this week to 92.94 U.S. cents. Australia's target lending rate of 7.25 percent compares with 2.25 percent in the U.S.

Citigroup Revenue

First-quarter revenue at Citigroup plunged 48 percent to $13.2 billion, compared with the average estimate of $11.1 billion from analysts surveyed by Bloomberg. The biggest U.S. bank by assets reported a $5.11 billion loss. The Standard & Poor's 500 Index added 1.7 percent.

Futures on the Chicago Board of Trade show no chance the Fed will cut its 2.25 percent target rate for overnight lending between banks by a half-percentage point on April 30, down from 46 percent odds a week ago. There's a 90 percent likelihood of a quarter-point reduction and 10 percent odds of no cut.

Two-year Treasury note yields rose 0.46 percentage point this week, the most since November 2001, to 2.22 percent. That leaves the yield 1.62 percentage points higher than that of the same-maturity Japanese bonds, the widest since Jan. 29.

`Bullish Component'

``It's a bullish component for the dollar,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``It's part of a reflection of the adjustment of fed funds rate expectations.''

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, rose for a second day, increasing to 72.228 today, from 71.680 yesterday. It dropped to a record of 70.698 on March 17.

``Right now we have a calmer market,'' said Nick Bennenbroek, head of currency research in New York at Wells Fargo & Co. in an interview with Bloomberg Radio. ``But it's more of a blip than a sustained turnaround. As far as news about the U.S. economy goes, it's going to be a little while before we see an improvement.''

The euro advanced earlier against the dollar after a government report showed German producer prices rose at the fastest pace in 15 months, adding to speculation the European Central Bank will keep its main refinancing rate at a six-year high of 4 percent.

Barclays Plc analysts led by David Woo, London-based global head of currency strategy, wrote in a research note yesterday that the dollar will weaken to 1.63 per euro in three months as record oil prices increase U.S. import costs and prevent the ECB from cutting interest rates because of inflation.

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