By Ye Xie and Matt Townsend
Nov. 7 (Bloomberg) -- The dollar fell against the euro on speculation the Federal Reserve will keep borrowing costs near zero into next year after the U.S. unemployment rate exceeded 10 percent for the first time since 1983.
Sterling advanced for a second week versus the dollar after the Bank of England expanded its debt-buying program less than economists had forecast, reducing concern policy makers are flooding the market with currency. The European Central Bank signaled an exit from economic stimulus before a report next week expected to show the euro zone’s economy expanded.
“The Fed is firmly on hold,” said Alan Ruskin , head of international currency strategy in North America at RBS Securities Inc. in Stamford, Connecticut. “Do you really want to buy the dollar on weak U.S. data? It’s not obvious. On balance, the trading environment remains dollar-negative.”
The dollar declined 0.9 percent to $1.4847 per euro yesterday, from $1.4719 on Oct. 30. The dollar decreased 0.2 percent to 89.88 yen, from 90.09. The euro rose 0.6 percent to 133.45 yen, from 132.61.
Group of 20 finance chiefs will likely urge Asian nations to allow their currencies to appreciate during their meeting this weekend in Scotland, according to UBS AG.
While exchange rates won’t be on the agenda, “many nations will seek to bring it up,” Geoffrey Yu , currency strategist in London at UBS, wrote in a research report to clients.
Real Versus Dollar
Brazil’s real appreciated 2.4 percent to 1.7202 versus the dollar and Sweden’s krona gained 1.5 percent to 6.9894 as a rally in U.S. stocks encouraged investors to increase carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher. The fed funds target of zero to 0.25 percent makes the dollar a favored vehicle for investors seeking to fund such trades.
“We think that the dollar-negative trade is in place for the next couple of months,” said Steven Englander , chief U.S. currency strategist at Barclays Capital in New York, in an interview on Bloomberg Television yesterday.
The Standard & Poor’s 500 Index advanced 3.2 percent in its biggest weekly gain in almost a month. The Dow Jones Industrial Average finished the week above 10,000.
South Africa’s rand was the biggest winner versus the dollar as gold futures jumped to a record $1,101.90 as a hedge against the weakening dollar. The rand advanced 3.7 percent to 7.5357 in its biggest rally since July. South Africa is the world’s third-largest gold miner.
Fed Rate View
Traders reduced bets that U.S. policy makers will increase borrowing costs in the first half of next year. Fed funds futures showed yesterday that there’s a 52 percent chance that policy makers would raise their benchmark by at least a quarter- percentage point by the June meeting. A week ago the likelihood was 63 percent.
The Fed repeated at the end of a two-day policy meeting on Nov. 4 its intent to keep interest rates “exceptionally low” for “an extended period.”
Employers eliminated 190,000 jobs in October after a reduction of 219,000 in the previous month, the Labor Department reported yesterday in Washington. The unemployment rate in the U.S. jumped to 10.2 percent, from 9.8 percent in September. The median forecast of 81 economists in a Bloomberg survey was for an increase to 9.9 percent.
European Central Bank President Jean-Claude Trichet took a step toward removing emergency stimulus measures designed to end the recession on Nov. 5, saying commercial banks won’t be offered unlimited 12-month loans next year. Policy makers kept the main refinancing rate at a record low 1 percent.
Europe’s Economy
The European economy grew 0.5 percent in the third quarter, after contracting 0.2 percent in the previous three-month period, according to the median forecast of 34 economists in a Bloomberg survey. The European Union is scheduled to release the report on Nov. 13.
Deutsche Bank AG, the world’s largest currency trader, lowered its forecast for the dollar this week, predicting it would weaken to $1.55 per euro by year-end. Its previous estimate was for a slide to $1.50.
The pound rose 1 percent this week to $1.6616 after the Bank of England increased asset purchases to 200 billion pounds ($332 billion) on Nov. 5. The median forecast of 48 analysts in a Bloomberg survey was for an increase to 225 billion pounds.
The Dollar Index , which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, dropped 0.7 percent this week to 75.762.
The index slid about 15 percent from a three-year high reached in March, dropping on speculation the Fed will be slow in raising borrowing costs. The index decreased to a 14-month low of 74.94 on Oct. 21.
The dollar will extend its decline against counterparts as yesterday’s payrolls report “confirms low rates in the U.S. until at least the second half of 2010,” said Achim Walde , head of currency management in Cologne, Germany, at Oppenheim KAG, where he helps oversee 3 billion euros ($4.3 billion).
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net ; Matt Townsend in New York at mtownsend9@bloomberg.net
Last Updated: November 7, 2009 00:00 EST