Dollar May Extend Advance as U.S. Sentiment Spurs Safety Demand

July 1 -- The dollar may extend its gain versus the euro after a report showed an unexpected drop in U.S. consumer confidence for June, increasing demand for the safety of the world’s main reserve currency.

South Africa’s rand advanced yesterday to the strongest level versus the dollar since August after the nation posted its first trade surplus in more than two years. The Canadian dollar dropped to a six-week low and Norway’s krone declined as crude oil tumbled, reducing the revenue of commodity exporters.

“In the medium term, the dollar will probably trade higher,” said Jessica Hoversen, a foreign-exchange analyst in Chicago at MF Global Ltd., the world’s largest broker of exchange-traded futures. “From March until now, markets were pricing in a very robust economic recovery. We’re considering whether the recovery that’s been priced in is viable.”

The U.S. currency traded at $1.4035 versus the euro at 6:03 a.m. in Tokyo, following a 0.4 percent gain yesterday. The euro was little changed at 135.25 yen after reaching 135.96, the highest level since June 15. The dollar fetched 96.35 yen following a 0.3 percent advance.

The Dollar Index, which the ICE uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, increased 0.4 percent to 80.149.

The Conference Board’s index of U.S. sentiment decreased last month to 49.3 from a revised 54.8 in May, the New York- based research group said yesterday. The median forecast of 70 economists surveyed by Bloomberg News was for a gain to 55.3 from a previously reported 54.9.

Quarterly Losses

The dollar and yen were the biggest losers among major counterparts in the second quarter as signs that the global recession is abating encouraged investors to sell the two currencies they accumulated when financial turmoil mounted.

The U.S. currency declined 5.9 percent against the euro in the three months ended yesterday, its first quarterly drop since March 2008, pushing the greenback 0.4 percent lower in 2009. The yen fell 3 percent versus the euro in the second quarter.

“The dollar acted as a safe haven during the crisis, appreciating notably,” Ulrich Leuchtmann, head of foreign- exchange research in Frankfurt at Commerzbank AG, Germany’s second-largest lender, wrote in a client note yesterday. “So it’s to be expected that this situation would change once things returned to normal.”

Australia’s dollar posted record gains in the second quarter, rising 18 percent against the U.S. currency. New Zealand’s dollar strengthened 15 percent since March 31, the most since 1985.

Tankan Survey

The Bank of Japan’s Tankan survey today will probably show large manufacturers consider the worst of the recession to be over. An index of sentiment among large makers of electronics, cars and other goods will rise to minus 43 from a record low of minus 58 in March, according to the median forecast of 22 economists surveyed by Bloomberg News. A negative number means pessimists outnumber optimists.

The share of dollars in global foreign-exchange reserves increased to 65 percent in the first three months of this year, the highest level since 2007, from 64.1 percent in the fourth quarter of last year, the International Monetary Fund said in a statement yesterday. The euro’s share dropped to 25.9 percent from 26.5 percent, while the pound’s fell to 4 percent from 4.1 percent, the Washington-based lender said. The yen’s share of global reserves decreased to 2.9 percent from 3.2 percent.

The rand appreciated as much as 2 percent to 7.6722 against the dollar, the strongest level since Aug. 29, as South Africa posted a trade surplus of 2 billion rand ($258 million) in May following a deficit of 1.5 billion rand in the prior month. The rand gained 23 percent in the second quarter, the best performance among the 16 most-traded currencies tracked by Bloomberg.

Canadian Dollar

The Canadian dollar slid as much as 0.6 percent to C$1.1640, the weakest level since May 19, and the Norwegian krone declined as much as 0.9 percent to 6.4678 per dollar as crude oil for August delivery fell 2.1 percent to $70.02 a barrel. Norway is the world’s fifth-largest crude-oil supplier, while raw materials such as oil and gold account for half of Canada’s exports.

Goldman Sachs Group Inc. exited a bet that the Canadian dollar would strengthen versus the Mexican peso after the trade lost about 5 percent.

“Recent data points have gone against our fundamental views of continued stabilization in Canada and a lagging recovery in Mexico, relative to the global cycle,” analysts at the firm wrote yesterday in a note, citing worse-than-expected Canadian retail sales and employment figures as well as a less- than-forecast drop in Mexican industrial production.

The firm entered the trade on June 8 and was “stopped out” when the peso strengthened beyond 11.40 per Canadian dollar, the Goldman Sachs analysts wrote. A long position refers to a bet that a currency will rise. Traders place “stops” on trades to limit losses. The Canadian currency fell 0.7 percent to 11.3269 pesos yesterday. http://fxisforex.blogspot.com/