Dollar Rises on Speculation Investors Buying Safest U.S. Assets

Nov. 18 (Bloomberg) — The dollar rose against the euro and the yen on speculation overseas investors are buying more of the safest U.S. assets as the global economy enters a recession.

The greenback gained before the Treasury releases data that will probably show increased investment in the nation’s securities later today. The Australian dollar declined after the country’s central bank said it favored lower borrowing costs.

“We’ve got this pervasive risk aversion, and we are seeing dollar assets as attractive in a world permeated by fear,” said Adam Carr, senior economist at ICAP Australia Ltd. in Sydney. “I’m bullish on the U.S. dollar.”

The dollar rose to $1.2618 against the euro as of 1:38 p.m. in Tokyo from $1.2650 late yesterday in New York. It climbed to 96.60 yen from 96.43 yen. The euro bought 121.88 yen from 121.99 yen. The pound was quoted at $1.4980 from $1.4989. The dollar may strengthen to $1.23 per euro and 105 yen by year-end, Carr forecast.

Overseas investors bought a net $27.2 billion of U.S. assets in September, compared with net purchases of $14 billion in August, according to a Bloomberg News survey of economists. The Treasury will release the report at 9 a.m. today in Washington.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the currencies of six major trading partners, rose to 87.152 from 86.807 yesterday. The index reached 88.147 on Nov. 13, the highest level since April 2006.

Financial markets may be under stress for months, U.S. Treasury Secretary Henry Paulson said at a conference yesterday in Washington, after a credit slump caused $966 billion in losses and writedowns since the start of 2007.

The Treasury received investor bids for four-week bills totaling more than triple the $34 billion that were sold at its Nov. 12 auction, indicating persistent demand for the safety of U.S. debt. The four-week bills were sold at the lowest rate since they were first auctioned in 2001.

“We expect risk aversion and ongoing deleveraging to be positive for the dollar, particularly against currencies where the central bank has more room to cut, such as the euro,” wrote currency strategists led by Zurich-based Mansoor Mohi-uddin at UBS AG, in a research note yesterday.

UBS forecasts the dollar may strengthen to $1.20 per euro in one month.

RBA Minutes

The Australian dollar fell 0.5 percent from late New York trading to 64.56 U.S. cents and slid 0.3 percent to 62.39 yen as prices of commodities the country exports fell. The Bloomberg UBS Constant Maturity Commodity Index of 26 raw materials such as oil and gold fell 1.5 percent to 911.95 yesterday, the lowest close since March 2006.

The Aussie, as the currency is known, extended declines after the Reserve Bank of Australian said its three-quarters of a percentage point cut to 5.25 percent on Nov. 4 would “enable a further meaningful reduction in rates paid by borrowers,” minutes of the meeting showed today.

“The RBA is likely to reduce rates further,” said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “There’s a downside risk for high-yielding currencies” such as the Australian dollar, the British pound and the euro versus the yen, he said.

The yen may strengthen to 110 per euro by year-end, he said.

Global Recession

The yen gained against the euro for a third day as the prospect of a global recession prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan’s currency.

The MSCI Asia Pacific index of regional shares fell 2.6 percent after U.S. stocks tumbled yesterday, extending a two- week decline. The Federal Reserve Bank of New York said yesterday its general economic index fell this month to minus 25.4, the lowest level since records began in 2001. Readings below zero signal New York State manufacturing shrank.

Japan’s economy entered a recession in the third quarter as corporate spending and export demand slumped, data showed yesterday. The 15 countries that share the euro are also in a recession, a report showed last week.

“We’re not likely to see any good economic news for some time,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Stocks and commodities show we’re in a recession. In this environment the yen is likely to gain.”

The yen may rise to 121 per euro and 95.50 against the dollar today, he said.

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  • Elena Morozova  On November 19, 2008 at 2:35 pm

    There is such a volatile environment at the moment. One day crude oil falls because OPEC President Dr Chakib Khelil suggests the oil cartel will decide not to cut production at its 29 November meeting in Cairo.

    Then the dollar rises because investors are looking for a safe haven, and seek the perceived relative safety of US Treasury Bills.

    But with the auto industry suggesting it needs a $25 billion bailout, more dollars would have to be pumped into the system.

    Are wew sure the US dollar is going to strengthen?

    Jim Rogers has been quoted as saying he is keen on investing in precious metals such as silver and gold, while going short US Treasuries.

    And Iran has been converting its foreign exchange holdings into gold.

    We live in interesting times.

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