Thursday, Aug 12, 2010


 
  By Frances McInnis 
  Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The dollar advanced Thursday as rising fears of a global economic slowdown boosted the traditional safe harbor and weighed on the euro and other higher-yielding currencies.

The dollar also rose against the yen after Japanese officials ramped up their rhetoric against their currency's recent strength.

The euro and some other currencies tied to growth, such as the New Zealand dollar, were hit by "the negative newsflow," including disappointing U.S. jobless claims and concerns over Irish bank debt, said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago.

"Slower economic growth is a reality and this is being priced into the markets this week," he said.

Thursday afternoon, the euro was at $1.2836 from $1.2882 late Wednesday, according to EBS via CQG. The dollar was at Y85.94 from Y85.37, while the euro was at Y110.29 from Y109.99. The U.K. pound was at $1.5564 from $1.5683. The dollar was at CHF1.0510 from CHF1.0576.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 82.570 from 82.276.

A string of recent soft data out of Europe, the U.S. and Asia sent investors out of growth- and risk-sensitive assets. Industrial production in the 16 countries that share the euro fell unexpectedly in June following declines in output in France and Germany, according to data from the European Union's Eurostat statistics office.

The euro was also dented by reports the European Central Bank bought short-dated Irish government bonds Wednesday and early Thursday in an attempt to calm market volatility stemming from concerns of the creditworthiness of Irish banks.

U.S. weekly jobless claims reported Thursday unexpectedly climbed to their highest level in six months, contributing a bit more to the somber tone in markets.

Finally, the Greek economy contracted sharply in the second quarter as government austerity measures bit deeper into incomes, according to government data released Thursday. The dismal figures reinforced concerns about the negative effects austerity measures will have on the economies of peripheral euro-zone nations.

"Recovery will take time, it will be painful, and it will be slow," said Simon Smollet, senior foreign exchange options strategist at Credit Agricole CIB in London. Smollet expects that the common currency will continue to slide, falling as far as 1.15 against the dollar by the year's end.

The flight to safety has Japanese officials concerned that yen strength will hurt Japan's export-driven economy. Japan's finance minister threatened to act against the rising yen Thursday, while the Bank of Japan governor issued an emergency statement warning against "substantial fluctuations" in exchange rates following the dollar's drop Wednesday to a 15-year low of Y84.72.

Reports that the Bank of Japan checked rates in Tokyo hours, which involves asking commercial banks for details of their currency transactions, drove home the message that the Japanese government is not happy with the yen's appreciation. Checking rates is considered a type of verbal intervention, but a step more serious than "jawboning."

When the yen is on the verge of appreciating too far too fast, "Japan tries to ratchet up the threat level of intervention," said Sebastien Galy, currency strategist at BNP Paribas in New York. Galy said investors are watching Japan's central bank closely, but still think direct intervention in markets is a long way away.

Separately, China's yuan was sharply lower against the U.S. dollar late in Asian trading after the central bank set the dollar-yuan central parity rate at a seven-week high. The yuan's decline, which erased a significant part of the Chinese currency's gains against the dollar since the People's Bank of China dropped the yuan's de facto peg to the dollar on June 19, reflects a global flight from risk, traders and analysts said.

The PBOC set the dollar-yuan central parity rate at 6.8015, up from 6.7768 Wednesday and its highest level since being set at 6.8100 on June 24, and also well above some traders' expectations of around 6.7800.

Wang Qing, an economist at Morgan Stanley, said the fixing Thursday was "completely artificial."

-By Frances McInnis, Dow Jones Newswires; 212-416-3417; frances.mcinnis@dowjones.com

(Megumi Fujikawa, Joy C. Shaw and J.R. Wu contributed to this article.)

(END) Dow Jones Newswires

August 12, 2010 13:26 ET (17:26 GMT)