Oct. 13, 2009, 3:25 p.m. EDT

Dollar slumps, tugged by gold, stocks

Comments 116
By Deborah Levine & William L. Watts,
MarketWatch

NEW YORK (MarketWatch) -- The U.S. dollar slumped to a new 14-month low versus major counterparts on Tuesday as investors favored gold, often viewed as the most stable currency, with the greenback's losses softened by a drop in U.S. stocks amid concerns about the strength of the economy's recovery.

"People are getting more hesitant to hold the dollar," said Greg Salvaggio, vice president for capital markets at Tempus Consulting Inc. "Gold is being used as an asset class to offer higher returns."

The dollar index, a measure of the greenback against a trade-weighted basket of currencies, fell 0.2% to 75.941. Earlier, it fell to its lowest level in 14 months.

The dollar pared some earlier losses that pushed the commodity-oriented Australian and Canadian dollars to levels not seen since before Lehman Brothers declared bankruptcy.

"It almost appears as if traders cannot stop selling dollars," said Kathy Lien, director of currency research at Global Forex Trading. "Newton's Law fully applies right now -- the dollar will continue to fall unless it has a good reason not to."

U.S. equities fell, with the Standard & Poor's 500 Index paring an earlier loss. See Market Snapshot.

European stocks fell into negative territory while Asian shares ended mostly higher. See Europe Markets.

While focus would be on earnings announcements, currency strategists at Citi noted "unlike in previous quarters, the bar for upside surprises is now set higher and economic data releases are more mixed."

Intervention Dilemma for The Bank of CanadaAs the Canadian rises back to parity for the first time in 2 years against the U.S. dollar, the Bank of Canada has to decide whether to let it threaten the recovery or step in and intervene for the first time in 10 years.

Oil futures rose above $74 a barrel in earlier trading, the highest in seven weeks, which also spurs concerns about higher inflation. Gold futures jumped to a record high near $1,070 an ounce. See Futures Movers. See Metals Stocks.

Investors look to gold "as a hedge against inflation and market volatility," Salvaggio said.

The rise in prices of key commodities has brought more attention to the currencies of countries that export them. After Australia's central bank unexpectedly raised its benchmark interest rate recently, more speculation has surrounded what country will be next. Canada, New Zealand and Norway are the most likely candidates.

The Australian dollar gained as much as 0.8% versus the U.S. unit, paring an earlier advance, to recently trade at 90.60 U.S. cents. The U.S. dollar fell as much as 0.8% versus the Canadian dollar, moderating the drop to buy C$1.0338, despite ideas Canadian authorities may soon intervene for the first time in a decade to stem the Canadian currency's rise.

"By any stretch of the imagination, [the U.S. dollar/Canadian dollar cross] is starting to look stretched," said Simon Derrick, currency strategist at Bank of New York Mellon.

"Not only does it stand within a whisker of breaking through parity for the first time since the fourth quarter of 2007 but it now also stands over 20% below its average price for the past quarter of a century."

Reserve holdings
Analysts also noted reports about what central banks are doing with their reserves that indicate a shift away from the U.S. currency, confirming a long-standing fear in the market.

"Emerging market central banks are increasingly reluctant to accumulate dollars, appearing more aggressive than in the past in shifting out of the U.S. dollar into other G10 currencies," according to IMF data, Barclays Capital strategists wrote in a note.

That's also weakening the dollar, and in part explains why the euro is advancing despite a weak German economic report, Salvaggio said.

The euro rose to the highest since August 2008 to buy $1.4828, up from $1.4786 late Monday in North American trading.

The euro initially retreated after the German ZEW economic sentiment indicator posted a small but unexpected fall, underlining expectations the German economic recovery will be relatively subdued, analysts said. See full story.

The British pound gained 0.6% versus the dollar to $1.5902. The pound initially weakened after data showed annual U.K. consumer inflation slowed to a five-month low of 1.1% in September. See full story.

The dollar bought 89.82 yen, compared to 89.86 yen late Monday.

"It is widely regarded that of the G10 central banks, the Bank of Japan will hike rates last if this recovery ensues," strategists at Brown Brothers Harriman wrote.

Deborah Levine is a MarketWatch reporter, based in New York.

William L. Watts is a reporter for MarketWatch in London.

http://www.marketwatch.com/story/dollar ... 2009-10-13