Dollar Rises as Stocks Erase Gains, Reviving Demand for Safety

Aug. 24 -- The dollar advanced against the euro for the first time in five days as U.S. stocks erased gains, reviving demand for relative safety.

The pound declined to an 11-week low versus the euro as two-year gilts yielded near the least relative to comparable- maturity German notes since January. The euro earlier gained versus the yen as a report showed European industrial orders climbed the most in 19 months.

“People are seeing negative equities and running back to the safe-haven guys,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “This market’s thin enough that you could move the market” just by closing some trades.

The U.S. currency appreciated 0.2 percent to $1.4296 per euro at 4:09 p.m. in New York, from $1.4326 on Aug. 21. The yen traded at 135.14 against the euro, compared with 135.21. The dollar rose 0.2 percent to 94.55 yen, from 94.38.

Stocks erased advances as financial institutions slumped after SunTrust Banks Inc. said lenders face more credit losses and commercial real estate may falter through 2010. The Standard & Poor’s 500 Index was little changed after rallying 2.2 percent last week.

Sterling dropped against 14 of the 16 most-traded counterparts tracked by Bloomberg on speculation the Bank of England will depress yields on gilts, making the U.K.’s assets less attractive to foreign investors.

The U.K. two-year note yielded 44 basis points less than the equivalent German security. The spread reached 48 basis points on Aug. 21, the widest since Jan. 2.

Pound Versus Euro

Sterling dropped as much as 0.6 percent to 87.28 pence per euro, the weakest level since June 8. The pound dropped 0.6 percent to $1.6411.

The euro erased its gains versus the yen today as Treasury yields fell and the European Central Bank Governing Council member Yves Mersch warned against “succumbing to optimism” with regard to the economic situation, Luxembourg’s Wort reported, citing an interview to be published tomorrow. fxisforex.blogspot.com

Orders at industrial companies rose 3.1 percent in June from the prior month, the biggest increase since November 2007, the European Union’s statistics office said. The production and income category of the Chicago Fed’s National Activity Index increased last month, a report showed.

German business confidence probably advanced in August for a fifth month, according to the median forecast of 41 analysts in a Bloomberg News survey before the Munich-based Ifo institute’s report on Aug. 26.

‘Key’ Ifo Data

“We’ve got Ifo coming out this week, and that’s going to be quite key,” said Lauren Rosborough, a currency strategist in London at Westpac Banking Corp. “I get the feeling that improvement in Europe has not been completely priced in.”

The euro will probably gain versus the dollar, approaching $1.4450 in a month, she predicted.

Speaking at the annual central bankers’ symposium in Jackson Hole, Wyoming, last week, Bernanke and ECB President Jean-Claude Trichet said the global economy is pulling out of its deepest recession since the 1930s.

“Prospects for a return to growth in the near term appear good,” while “critical challenges remain,” including possible further losses for financial firms, Bernanke said Aug. 21.

Trichet said at the conference the following day there are signs confirming that the economy “is starting to get out of the period of freefall.” This “does not mean at all that we do not have a very bumpy road ahead of us,” he said.

“Bernanke was the cheerleader of growth, Trichet expressed cautiousness on the growth outlook,” Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France’s biggest bank, wrote in a note today.

The global economy is showing “clear” signs of a rebound, and interest rate policies are likely to stay accommodative for many months, John Lipsky, the International Monetary Fund’s first deputy managing director, wrote on the Washington-based lender’s Web site today.