03 Mar 2009
March 3 (Bloomberg) -- The dollar and the yen fell after Australia's central bank unexpectedly kept interest rates unchanged, boosting demand for higher-yielding assets.The U.S. and Japanese currencies also snapped two days of gains versus the euro as Asian shares pared losses and U.S. stock futures climbed, increasing confidence among investors to resume so-called carry trades. Currencies of higher-yielding economies such as Australia, New Zealand, South Africa and Brazil all strengthened.
"Investors may look for higher returns abroad," after the decision of Australia's central bank, said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank.
The dollar declined to $1.2629 per euro as of 2:17 p.m. in Tokyo from $1.2578 late in New York yesterday. The yen dropped to 123.11 per euro from 122.58. The U.S. currency was little changed at 97.49 yen from 97.45 yen.
Australia's currency rose 1.5 percent to 63.97 U.S. cents and advanced 1.5 percent to 62.31 yen from late in New York yesterday. New Zealand's dollar climbed 0.8 percent to 49.69 cents and added 0.9 percent to 48.42 yen. Against Japan's currency, South Africa's rand gained 0.4 percent to 9.3026 and Brazil's real strengthened 0.1 percent to 39.7947.
The Reserve Bank of Australia left the overnight cash target at 3.25 percent at today's meeting. Only four of 18 economists surveyed by Bloomberg News forecast the decision.
Carry Trades
Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3.25 percent in Australia and 3.5 percent in New Zealand, encouraging investors to borrow in Japan and the U.S. and invest in higher-yielding assets elsewhere.
In these so-called carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is market moves can erase those profits.
Demand for higher-yielding currencies was also supported by speculation a government report tomorrow will show Australia's gross domestic product rose 0.2 percent last quarter from the prior three months.
"In the short-term, the Aussie dollar should sustain this bounce because people will quickly turn to the GDP number tomorrow," said Sean Callow, a Sydney-based currency strategist at Westpac, Australia's fourth-largest bank by assets. "It looks like it will be a positive number, which in global terms is unique."
Eastern Europe
Gains in the euro may be limited on concern financial turmoil in central and eastern Europe is worsening after Fitch this week cut the outlook on Hungary's debt rating to "negative" from "stable."
Hungary's long-term foreign currency debt is rated BBB, the second-lowest investment grade, Fitch said in a statement yesterday in London. The ratings company "doesn't discount the potential" the country will need further international support, it said. European Union leaders on March 1 vetoed Hungary's proposal for 180 billion euros ($227 billion) of loans to eastern European economies.
"Within the next six months, there's no way these eastern European countries -- Poland, Ukraine, Estonia, even Greece -- will be able to avoid defaulting," said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina. "It's going to be impossible to pay off the loans. Where is the money going to come from?"
The dollar also declined for the first time in three days against the euro before U.S. reports this week on housing and employment that may add to signs the world's largest economy is sinking deeper into recession.
‘Deeply Rooted'
"The market is starting to realize again that the situation in the U.S. is far more deeply rooted than in Japan," said Daisuke Uno, chief bond and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo. "The focus is now on all the bad news, especially with the jobs data coming up, which will increase dollar selling pressure."
The dollar fell against 14 of the 16 most-active currencies today before a National Association of Realtors that may show its index of pending home sales dropped 3.5 percent in January after a 6.3 percent increase in December, according to a Bloomberg News survey. Companies in the U.S. cut an estimated 630,000 jobs in February, economists surveyed by Bloomberg predict the ADP Employer Services gauge will show tomorrow.
The Dollar Index, which tracks the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined to 88.663 from 88.940 yesterday when it reached 89.003, the strongest since April 2006.
Stocks Pare Drop
The MSCI Asia Pacific Index for regional shares pared losses, declining 0.2 percent, after earlier sliding as much as 1.7 percent. Futures on the Standard & Poor's 500 Index advanced 1.2 percent.
The world's largest economy will likely shrink at an annual pace of 7 percent this quarter and 3 percent next quarter, Edward McKelvey, a New York-based senior economist at Goldman Sachs Group Inc., wrote in a research note yesterday. The forecasts compare with previous predictions for declines of 4.5 percent and 1 percent, respectively.
"The risks to our expectations for near-term U.S. economic activity swung sharply to the downside last week," McKelvey wrote, citing factors such as the Commerce Department's report on Feb. 27 that showed the economy contracted at a larger-than- expected annual pace of 6.2 percent last quarter.
