Dollar Trades Near 7-Week Low on Stocks Rally, U.S. Home Prices

July 28 -- The dollar traded near the lowest level in seven weeks against the euro as Asian stocks extended a global rally, adding to evidence investors are shifting to higher-yielding assets.

The Australian dollar rose for a third day against the greenback after the Reserve Bank of Australia said the South Pacific nation’s economy may rebound faster than it forecast six months ago. The yen rose against the dollar on speculation Japanese exporters are taking advantage of the currency’s drop in the past week to repatriate funds.

“Rising share prices will make it easier for investors to take more risks,” said Toshiya Yamauchi, manager of the foreign-exchange margin trading department in Tokyo at Ueda Harlow Ltd. “Under such circumstances, the dollar and the yen will weaken, especially against the currencies of resource-rich nations and emerging markets.”

The yen fell to 135.54 per euro as of 6:07 a.m. in London from 135.48 in New York yesterday, when it reached 136.10, the lowest since July 2. Japan’s currency advanced to 95.06 per dollar from 95.18. It touched 95.38 yesterday, the weakest since July 7. The dollar traded at $1.4258 per euro from $1.4232.

MSCI’s Asia Pacific index of regional shares rose for an 11th day, the longest winning streak since January 2004, boosting demand for higher-yielding assets in carry trades. The index rose 0.7 percent today.

Dollar Index

The Dollar Index was near the lowest level this year before a report that economists said will show U.S. home prices fell at a slower pace in May, indicating the American economy may be recovering, trimming demand for safe haven currencies.

The S&P/Case Shiller index of 20 major metropolitan areas, scheduled for release today, will show property values fell 17.9 percent in May from a year earlier, according to a Bloomberg News survey of economists. The measure was down 18.1 percent in the 12 months ended April.

The Dollar Index, which the ICE uses to track the greenback against currencies including the yen, pound and Swedish krona, was at 78.546 from 78.626 yesterday, near this year’s low of 78.334 on June 2

The Australian dollar climbed after RBA Governor Glenn Stevens said it appears “that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries.”

Upside Risks

“We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago,” the Reserve Bank chief said in Sydney today.

Stevens left the benchmark lending rate at 3 percent on July 7 for a third month amid signs the lowest borrowing costs in half a century and government spending helped the nation skirt a recession.

“With Australia’s economy apparently doing well, there may be no more scope for interest-rate cuts,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “Higher-yielding currencies such as Australia’s dollar will likely be popular, with demand from people in countries with low yields such as Japan.”

Benchmark interest rates of 8.75 percent in Brazil and 0.25 percent in Sweden compare with 0.1 percent in Japan and as low as zero in the U.S.

The Australian dollar rose to 82.81 U.S. cents from 82.27 cents yesterday.

Exporter Selling

Losses in the yen were tempered amid speculation Japanese exporters sold the dollar to bring back overseas earnings before the month-end.

“Exporters are prone to buy the yen, given that the end of the month is near,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale, France’s third- largest bank. “There’s talk that a lot of euro government bonds are maturing this week, so we may see some yen repatriation.”

Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.

Adding to pressure on the dollar, China’s Assistant Finance Minister Zhu Guangyao said on the first day of bilateral talks with U.S. officials that his government remains “concerned” about the value of its U.S. assets.

Zhu’s remarks come after repeated public assurances by Treasury Secretary Timothy Geithner that the U.S. is committed to reining in a record budget deficit once an economic recovery is secured. China is the biggest foreign investor in U.S. government debt, and any decline in demand could push up borrowing costs.

‘Massive Holdings’

“China has massive holdings of Treasuries, so it is obviously worried,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Any diversification away from the dollar could be gradual, and the greenback may weaken a bit.”

A rising number of derivative bets that the dollar will fall may indicate that the currency is poised to rebound, according to Bank of Tokyo-Mitsubishi UFJ Ltd. Futures positions, when they reach an extreme, are viewed as a contrarian indicator because traders often rush to reduce positions when momentum in a currency shifts.

The large dollar net short position “could make further headway on dollar selling more slow going and frustrating,” wrote Derek Halpenny, head of global-currency research in London at Bank of Tokyo-Mitsubishi, in a note yesterday. A short position is a bet an asset will decline.

The bank predicts the euro’s gains versus the dollar will stall in the $1.45 to $1.5 range, and then be followed by a move to $1.3 in 2010.