CURRENCIES: Dollar Extends Gains As Equities Fall Further

By Deborah Levine

The U.S. dollar rose on Wednesday, stretching a rally against a basket of currencies to a fifth session, supported by weak U.S. economic data that weighed on equity markets and led investors to seek safety in the greenback and cut exposure to assets perceived as risky.

The dollar index (DXY), which tracks the performance of the greenback against a basket of other major currencies, rose to 76.456 compared with 76.149 in late North American trading on Tuesday.

The index has rallied for four trading days.

The euro declined for a third day to $1.4713 from $1.4786 late Tuesday.

The Japanese yen, however, was the main beneficiary of safe-haven inflows, gaining against even the greenback. The dollar fell 1.1% to 90.80 yen, while the euro dropped 1.7% to 133.58 yen.

U.S. stock markets also declined and European and Asian markets posted losses. The Standard & Poor's 500 Index (SPX) lost 1.7% in recent trading.

"The U.S. dollar continues to trade with a firm tone as risk-on trades continue to be cut back," wrote analysts at Brown Brothers Harriman & Co. in a note to clients.

Also reflecting a turn away from riskier assets, Treasury debt rallied and gold futures declined.

The dollar had slumped to 14-month lows as stocks rallied since March, prompting investors to get out of safe-haven dollar holdings. Near-zero interest rates in the U.S. have also prompted investors to borrow dollars to invest in risky assets, such as stocks and commodities.

But hesitations about whether stocks have now priced in too much of an economic rebound have recently helped support the dollar.

On Wednesday, the dollar reclaimed small gains after a report showed U.S. new-home sales fell 3.6% in September to a 402,000 pace. Economists surveyed by MarketWatch predicted an improvement to a 438,000 pace in September.

"The latest housing data supports our call that the economy is still at significant risk for a double dip, said Steven Ricchiuto, chief economist at Mizuho Securities, in a note.

Separately, the Commerce Department reported orders for U.S.-made durable goods rose 1% in September, in line with the forecast of economists.

The data came ahead of Thursday's eagerly awaited key gross domestic product, which is expected to show the U.S. economy returned to growth in the third-quarter.

Next week, the Federal Reserve will hold its monetary policy meeting.

According to Steven Englander, currency strategist at Barclays Capital, there are concerns in markets that the Fed might plan to remove liquidity more quickly than expected, which explains some of the pressure in stocks and recent dollar strength.

But "there are two reasons we expect the pullback to be temporary: we do not expect the Fed liquidity withdrawal/pace of rate increases to be as aggressive as the market has come to expect over the past week," Englander wrote in a note.

"And we continue to see broader risk measures as reflecting too little, rather than too much, risk appetite," he said.

Australia, Norway

Particularly hard hit Wednesday was the Australian dollar, which tumbled 1.9% against the greenback to 89.84 U.S. cents after Australian inflation data came in slightly below expectations, leading investors to pare bets that the Reserve Bank of Australia will decide on a hefty interest-rate hike next week.

Higher interest rates boost the return of investments denominated in a country's currency.

The U.S. currency gained 2.2% versus the New Zealand dollar ahead of the Reserve Bank of New Zealand's decision on interest rates, which is due at 9 a.m. on Oct. 29 local time.

The dollar regained an advantage over the Norwegian krone after the Norges Bank, Norway's central bank, raised interest rates by a quarter-percentage point, making it the second major central bank to raise rates since the credit crunch began.

The decision was as analysts' expected and the krone lost some steam. As an oil exporter, the krone has been one of the favorites among currency traders. The dollar has plunged almost 19% versus the krone this year. On Wednesday, the dollar retraced some of that move, rising 1.6% versus the Norwegian currency.

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(END) Dow Jones Newswires

October 28, 2009 15:43 ET (19:43 GMT)


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