Dollar May Drop as Economic Prospects Reduce Demand for Safety

June 10 -- The dollar may extend its decline against the euro as speculation the global recession may be ending reduces demand for the U.S. currency as a refuge.

The pound advanced versus the dollar yesterday as Britain’s political turmoil eased and house prices showed signs of stabilizing last month. Goldman Sachs Group Inc. recommended that its clients buy the euro versus the dollar, citing a recovery in global growth expectations and a “broader pickup” in demand for higher-yielding assets.

“We are in a process now where the dollar is weakening,” said Steven Barrow, head of Group of 10 research in London at Standard Bank Plc, in an interview on Bloomberg Radio. “When investors start to take more risk, they will start moving out of the dollar they held during the credit crunch and look to buy other currencies.”

The dollar traded at $1.4068 against the euro at 6:10 a.m. in Tokyo, after falling 1.2 percent yesterday. The yen was at 136.98 versus the euro, following a 0.1 percent drop. The dollar bought 97.37 yen, after depreciating 1.1 percent.

The trade-weighted Dollar Index fell 1.4 percent yesterday to 79.766 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.

Canadian Dollar

Canada’s dollar and Norway’s krone advanced against the dollar as crude oil touched a level above $70 a barrel.

The Canadian dollar gained 1 percent to C$1.1049 versus the U.S. dollar yesterday, while the krone rose 1.8 percent to 6.3249. Crude oil is Norway’s biggest export, while raw materials account for more than half of Canada’s export revenue.

Brazil’s real rose 1.3 percent to 1.9380 versus the dollar after a government report showed Latin America’s largest economy contracted in the first quarter less than economists forecast. The real appreciated 19 percent versus the greenback this year in the best performance among the 16 most-traded currencies tracked by Bloomberg.

“It’s still a risk-positive story,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “We haven’t seen the top-off of the risky currencies. As long as you have positive surprises in economic readings, assets go up and confidence goes up. It creates a positive feedback.”

Stronger Lats

Latvia’s currency gained the most versus the euro in three years, spurring a rally in eastern European currencies as plans to cut state spending paved the way for the Baltic country to receive its next international bailout payment.

The lats strengthened as much as 0.9 percent to 0.6990 per euro, the biggest jump since June 2006, and approached the upper limit of the country’s peg to Europe’s single currency.

Latvia is battling to keep its currency within the 1 percent band required of the pre-euro exchange-rate mechanism and to meet budget-cut demands for its 7.5 billion euro ($10.4 billion) International Monetary Fund-led bailout.

Sweden’s krona was the biggest gainer against the euro yesterday among major currencies, appreciating 1 percent to 10.8045. Swedish banks have about $75 billion in loans to the Baltic states, according to the Bank for International Settlements in Basel, Switzerland.

Goldman on Euro

The 16-nation euro will rise to $1.45, said Goldman Sachs in a research note yesterday, saying the Federal Reserve will refrain from raising the target rate for overnight lending between banks “for a considerable period of time” in response to a slow recovery.

“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 yesterday a 45 percent chance of a rate increase by November, compared with 27 percent odds a week ago.

Dealers’ Fed View

Policy makers will keep the target lending rate in a range of zero to 0.25 percent this year, according to a Bloomberg News survey of the 16 primary dealers of U.S. government securities that trade with the central bank. A majority predict no increase until at least the second half of 2010.

The pound advanced against the dollar for a second day, increasing 1.4 percent to $1.6274 after the Royal Institution of Chartered Surveyors said the number of respondents in a monthly survey saying home values fell exceeded those reporting gains by 44.1 percentage points, the best reading since November 2007.

Sterling also appreciated on speculation Prime Minister Gordon Brown fended off calls to step down following a series of ministerial resignations and a drubbing in local and European Union elections.