Dollar Drops to Seven-Week Low as Earnings Pare Safety Demand

The dollar declined to a seven-week low versus the euro and the yen dropped as U.S. company results beat analysts’ estimates, reducing demand for safety.
The euro advanced for a second week after reports showed yesterday that the contraction in European manufacturing and services slowed more than forecast and German business confidence rose. The Canadian dollar reached the highest level since June 2 as oil prices gained and the central bank said the nation’s recession is ending.
“There’s slightly more economic optimism,” said Warren Naphtal, who overseas $870 million in assets as chief investment officer at P/E Investments in Waltham, Massachusetts. “What we are seeing is commodity-sensitive currencies, such as the Canadian dollar, are attracting capital. The main backdrop is improvement in outlook in general and the increase of the negative dollar view.”
The dollar declined 0.7 percent to $1.4202 per euro yesterday from $1.4102 on July 17. It touched $1.4291 on July 23, the weakest level since June 3. The yen slid 1.3 percent to 134.63 against the euro from 132.85. Japan’s currency depreciated 0.6 percent to 94.79 versus the dollar from 94.19.
Brazil’s real added 1.6 percent this week to 1.8957 per dollar and touched 1.8824 on July 23, the strongest level since Sept. 29. Brazil’s policy makers signaled a day earlier that they may stop lowering the target lending rate after cutting it by a half-percentage point to a record low of 8.75 percent.
The yen declined against all of its 16 most-traded counterparts tracked by Bloomberg, dropping 5.2 percent to 12.716 versus Sweden’s krona and declining 4.5 percent to 12.251 against the South African rand.
Rising Stocks
The Dow Jones Industrial Average rose above 9,000 for the first time since January on better-than-expected results from companies including Apple Inc. and Intel Corp., encouraging investors to borrow in Japan and buy higher-yielding assets elsewhere. Japan’s 0.1 percent target lending rate is among the lowest in the developed world.
Among Standard & Poor’s 500 Index companies that have posted second-quarter results, 75 percent beat the average analyst forecast, according to data compiled by Bloomberg. That would be the highest rate for a full quarter, Bloomberg data going back to 1993 show. About 300 S&P 500 companies have yet to report for the period.
The Norwegian krone and Canadian dollar were two of the best performers against the dollar among major currencies as crude oil prices rallied 5.4 percent this week to more than $68 a barrel. Oil is the biggest export for both countries.
Krone Versus Dollar
The krone advanced 2.5 percent to 6.2361 per dollar and reached 6.2190 yesterday, the strongest since June 3.
Canada’s currency, known as the loonie, appreciated 2.8 percent this week to C$1.0826 and touched C$1.0795 yesterday, the strongest level since early June.
The Bank of Canada said in a report this week that output will expand at a 1.3 percent annualized pace July through September, replacing a forecast of a 1 percent contraction.
The loonie’s 12 percent rally this year is an “important brake” on growth, and the central bank is watching it “very closely,” Bank of Canada Governor Mark Carney told reporters in Ottawa after releasing the economic outlook.
The euro advanced versus the dollar as Markit Economics said yesterday a composite index of the region’s manufacturing and services industries increased in July more than economists forecast to 46.8, representing the slowest pace of contraction in almost a year. A reading below 50 indicates a decline. The Ifo Institute in Munich said its German business climate index rose to 87.3 this month, a nine-month high.
U.S. Economy
The U.S. economy probably contracted at a 1.5 percent annual rate in the second quarter, after shrinking 5.5 percent in the previous three months, according to the median forecast of 66 economists surveyed by Bloomberg News. The report from the Commerce Department is due on July 31.
Citigroup Inc. recommended its clients “take profit” on a bet that the Canadian dollar will gain further against the yen yesterday. The Canadian currency gained 10 percent to 87.85 yen in the past two weeks.
“It’s difficult to sustain the risk rally in light of the lack of pickup in economic data,” said Todd Elmer, a currency strategist at Citigroup in New York, in an interview.
Investors should look to re-enter the Canadian dollar-yen trade at “better levels” on renewed capital outflow from Japanese investors, strategists including Elmer wrote in a note to clients yesterday.
Polish Zloty
Eastern European currencies such as the Polish zloty will advance in the next two weeks as “hot money” flows into the region on signs of global economic recovery, according to David Woo, global head of foreign-exchange strategy at Barclays Capital in London. The zloty gained 3.1 percent this week to 4.1966 per euro in one of the best performances among emerging- market currencies.
“A lot of investors still sit on a lot of cash on the sideline,” said Woo in an interview on Bloomberg Television this week. “What you are seeing is basically people being forced to essentially put money to work.”
Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee this week that while the U.S. economy is showing “tentative signs of stabilization,” the central bank intends to maintain a “highly accommodative” monetary policy for an extended period.