Dollar Falls as Optimism Slump Is Ending Erodes Safety Demand

June 10 -- The dollar extended declines against the higher-yielding currencies of Australia and South Korea as speculation the global recession is ending reduced demand for the greenback as a refuge.

The U.S. dollar weakened against 14 of the 16 most-traded currencies after Goldman Sachs Group Inc. recommended clients buy euros versus the dollar, citing a recovery in world growth expectations. The Australian and New Zealand dollars rose for a second day against the U.S. currency after crude oil reached a seven-month high and Asian equities gained. The Swedish krona climbed against the dollar and the euro on speculation plans to cut state spending in Latvia will trigger an international bailout, easing concerns that Swedish banks would face losses.

“When optimism about the global economy is out there, people feel less need to hold the dollars which they have accumulated for a rainy day,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co. “The dollar is likely to remain under pressure.”

Australia’s dollar rose 0.3 percent to 80.42 U.S. cents at 10:50 a.m. in Tokyo, from yesterday in New York. It climbed to 78.25 yen from 78.04 yen. New Zealand’s dollar traded at 62.92 U.S. cents and 61.24 yen from 62.71 cents and 61.08 yen.

The U.S. currency traded at $1.4073 against the euro from $1.4065 yesterday in New York. The yen was at 136.95 against the euro from 136.98 yesterday. The dollar bought 97.31 yen from 97.38. The Korean won climbed 0.9 percent, the most in a week, to 1,254.10 per dollar as overseas investors added to their holdings of the nation’s shares for a fourth straight day.

Crude oil for July delivery gained $1.92 to $70.01 a barrel on the New York Mercantile Exchange, the highest settlement since Nov. 4. Prices have risen about 60 percent this year.

‘Encouraging Sign’

The trade-weighted Dollar Index fell 0.1 percent today to 79.742 after the U.S. government approved 10 banks to buy back $68 billion of government shares. Treasury Secretary Timothy Geithner said in a statement the repayments are an “encouraging sign of financial repair.”

The index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, reached this year’s low of 78.334 on June 2.

The Bank of Japan may say in its June economic report that the economy isn’t worsening as fast as in previous months, Nikkei English News reported, without saying where it got the information. The central bank may elevate its view of the Japanese economy when the policy board meets next week as production and export declines stop and economic stimulus programs help, Nikkei said.

Beige Book

Losses in the dollar were tempered as traders cut some holdings of higher-yielding currencies before the Federal Reserve releases later today its Beige Book commentary on current economic conditions. The Commerce Department publishes retail sales data tomorrow. China will report tomorrow on investments and exports and release factory orders data June 12.

“Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts,” the Federal Reserve said April 15 in its previous Beige Book regional business survey covering five weeks through early April. “Wage and salary pressures eased as labor markets weakened.”

‘Very Important’

“This week’s data in the U.S. and China are very important to assessing the prospects of the global economy,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “If they turn out to be unsatisfactory, the euphoria may be called into question and inflows into higher-yielding currencies may take a breather.”

Sales at U.S. retailers increased in May for the first time in three months as demand for cars picked up, according to a Bloomberg News survey before the government report on June 11. Retail sales climbed 0.5 percent, according to the survey.

China’s urban fixed-asset investment probably surged 31 percent in May in response to the government’s 4 trillion yuan ($586 billion) stimulus package following a 30.5 percent increase in April, according to a separate Bloomberg News survey of economists. China’s statistics bureau will announce the data at 11 a.m. tomorrow.

Goldman on Euro

Goldman Sachs in a research note yesterday said the euro will rise to $1.45 and the Federal Reserve will refrain from raising the target rate for overnight lending between banks “for a considerable period of time.”

“The timing is now opportune,” Goldman Sachs wrote. “We think the level of growth will remain below trend, and U.S. rates will be kept low for a considerable period of time.”

The dollar rose the most against the euro in five weeks on June 5 after the Labor Department reported that U.S. job cuts slowed to 345,000 in May, the lowest level in eight months.

The employment report raised speculation that the Fed will boost the target lending rate to at least 0.5 percent by the end of the year. Fed funds futures contracts showed median forecast for the yesterday a 45 percent chance of a rate increase by November, compared with 27 percent odds a week ago.

The krona gained versus the dollar after Swedish Finance Minister Anders Borg said the Latvian government should do “what is necessary” to present a responsible economic policy. Norway’s krone also rose as crude oil snapped two days of declines.

“Baltic stress is manageable for Sweden’s economy and banking system and the krona remains attractive,” analysts including London-based Ray Farris at Credit Suisse Group AG wrote in a note yesterday. “If conditions in the Baltics were to improve, the krona should rally notably.”

The krona rose 0.1 percent to 10.7945 per euro and strengthened 0.1 percent to 7.6744 against the dollar.