Dollar strengthens as equities drop, short-term treasuries rise

The dollar rose against most of its major counterparts and posted its first weekly gain versus the euro in November as investors sold shares and bought short-term Treasuries to guard against losses before year-end.

The yen gained versus the euro as stock indexes in the U.S., Germany and Japan dropped, discouraging demand for riskier assets. The greenback completed its fourth straight weekly loss versus the yen on bets the Federal Reserve, due to release minutes of its Nov. 4 meeting next week, will keep borrowing costs at virtually zero through the first half of 2010.

“The markets have been getting a little tougher,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

“The Fed introduced conditionality in its policy, and it will be interesting to see the rationale and reasons for that in the minutes.”

The dollar strengthened 0.3 percent to $1.4862 per euro from $1.4903 on Nov. 13. The 16-nation currency touched $1.4802, the lowest level since Nov. 4. The yen appreciated 1.2 percent to 132.09 per euro, from 133.63. The U.S. currency fell 0.9 percent to 88.88 yen, after touching 88.64 on Nov. 19, the lowest level since Oct. 9.

The Fed reiterated at its meeting this month that it will keep the target lending rate at zero to 0.25 percent for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. The minutes are due Nov. 24.

The Bank of Japan left its benchmark interest rate unchanged at 0.1 percent at the end of its policy meeting and raised its monthly assessment, saying the economy is picking up.

“The yen won’t materially sell off until we see a rise in U.S. interest rates,” Adam Cole, London-based global head of currency strategy at Royal Bank of Canada, said in a Bloomberg Television interview.

New Zealand’s dollar slid 3.5 percent to 64.36 yen and Sweden’s krona dropped 1.3 percent to 6.9306 per dollar as the drop in stocks discouraged carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates. Benchmark rates in the U.S. and Japan, among the lowest in the industrialized world, make their currencies popular for funding such transactions.

The Standard & Poor’s 500 Index fell 0.2 percent this week, and the MSCI World Index of shares dropped 1.1 percent. The Nikkei 225 Stock Average slid 2.8 percent, capping its fourth straight weekly loss.

Treasury two-year note yields fell yesterday to the lowest level this year on concern the rally in riskier assets has outpaced U.S. growth prospects. Three-month bill rates turned negative on Nov. 19 for the first time since last year’s credit freeze as the 64 percent rally in the S&P 500 from a 12-year low in March pushed valuations to about 22 times its companies’ reported earnings, the highest level since 2002.

“If you’ve been long all these asset classes and all these things that have done well, performed well, it’s the end of the year,” said David Ader, the head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “You do not get fired at the end of a calendar year for booking some profits. Now is not the time when people are going to add to risk.”

(Source: Bloomberg)

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