(Bloomberg) -- The dollar may rise further after strengthening beyond $1.29 per euro for the first time in a month and the yen advanced against all of its major counterparts as concern banking losses will deepen spurred demand for the currencies as a haven.
The yen rose yesterday to the strongest level in more than two weeks versus the Canadian dollar while the U.S. dollar advanced against the Brazilian real as shares of Bank of America Corp. and Citigroup Inc. tumbled. The euro dropped against the dollar on speculation disagreement is deepening among European Central Bank policy makers on measures to combat the recession.
“We favor the dollar and the yen,” said Benedikt Germanier, a strategist in Stamford, Connecticut, at UBS AG, the second-largest currency trader. “If we don’t get a depression scenario, then we are in a deep recession.”
The dollar traded at $1.2917 per euro at 6:18 a.m. in Tokyo, after rising 1 percent yesterday and reaching $1.2889, the strongest level since March 16. The yen was at 126.50 per euro, following a 2.2 percent gain and an advance to 126.18, also the strongest level since March 16. Japan’s currency fetched 97.95 per dollar, after rising 1.3 percent.
A break of $1.2946, a 61.8 percent retracement of the 8 percent advance of the euro from March 4 to March 19, indicates it will decline to “mid-$1.27,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.
The Swedish krona fell for a fourth day versus the euro, dropping as much as 1.9 percent to 11.2424, the weakest level since March 12. Against the dollar, it dropped 2.8 percent to 8.6958. The Riksbank may halve the benchmark repo rate to a record low of 0.5 percent today, according to the median forecast in a Bloomberg survey.
UBS on Krona
UBS recommended its clients sell the krona against the dollar, forecasting that the Swedish currency will decline to 9 versus the greenback, currency strategist Brian Kim in Stamford, Connecticut, wrote in a research note yesterday.
The yen appreciated as much as 3.5 percent to 79.01 versus the Canadian dollar, the strongest level since April 2, and 3.2 percent to 14.33 against the Norwegian krone as the Standard & Poor’s 500 Index lost 4.3 percent. The dollar rose 2.2 percent to 2.2442 Brazilian reais.
Bank of America dropped 24 percent yesterday as rising charge-offs for uncollectible loans overshadowed better-than- estimated earnings. Citigroup fell almost 20 percent after Goldman Sachs Group Inc. said the bank’s credit losses are growing at a “rapid rate.”
‘Stress Tests’
President Barack Obama said on April 19 that he will demand “accountability” from any U.S. banks that require additional taxpayer money following “stress tests” being conducted by regulators. The tests are being used to determine whether the companies have enough capital to cover losses over the next two years should the recession worsen. The Federal Reserve plans to give results May 4.
The euro dropped to a one-month low versus the yen on signs the recession in the 16-nation region is deepening. The contraction in Germany, Europe’s largest economy, worsened in the first quarter, the country’s central bank said.
ECB Executive Board member Lorenzo Bini Smaghi, asked if he favors cutting the benchmark rate to 1 percent and leaving it there, said “it would be more credible to act that way,” Financial Times Deutschland reported yesterday. Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy. The ECB’s next meeting is May 7.
‘Hate the Euro’
“You have to love to hate the euro,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The ambiguity of the ECB’s stance is not helping. More sober global risk sentiment is not constructive for the euro either.” The euro will decline to $1.20 by year-end, according to Serebriakov.
A breakdown of the correlation between the euro-dollar exchange rate and the S&P index indicates the currency pair “has become a trade that is less about risk, a little more about euro rate specifics,” wrote Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut, in a research note to clients yesterday.
The euro-dollar pair and the S&P 500 Index had a correlation of minus 0.37 over the past month, compared with 0.92 over the past year, according to a Bloomberg calculation based on value changes. A correlation of 1 would mean they are in lockstep.
Ruskin recommends investors sell the euro on “upticks” as the ECB abandons “monetary orthodoxy” and uses unconventional measures to spur growth.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
