Aug. 20, 2010, 3:47 p.m. EDT

Dollar rallies on euro; German official's comments cited

Swiss franc gains in flight-to-safety trade

By Deborah Levine and William L. Watts, MarketWatch

NEW YORK (MarketWatch) -- The euro slumped to its lowest level against the dollar in more than a month on Friday, after a German official signaled that the European Central Bank will maintain emergency lending support for euro-zone institutions through the beginning of next year.

The U.S. dollar also jumped against most major currencies amid a continuation of the sharp decline in investors' appetite for riskier assets, including stocks, following a string of surprisingly weak U.S. economic data on Thursday.

The euro /quotes/comstock/21o!x:seurusd (EURUSD 1.2705, -0.0114, -0.8893%) fell to $1.2711, down from $1.2819 in North American trading late Thursday. It sunk to $1.2662 earlier, the lowest since July 13.

The euro also lost ground on the Japanese yen /quotes/comstock/21o!x:seurjpy (EURYEN 108.8200, -0.4800, -0.4392%) , trading at ¥108.89 versus ¥109.42 Thursday.

The dollar /quotes/comstock/21o!x:susdjpy (USDYEN 85.6100, +0.3500, +0.4105%) traded at ¥85.69, from ¥85.34 Wednesday.

The British pound /quotes/comstock/21o!x:sgbpusd (GBPUSD 1.5531, -0.0064, -0.4104%) retreated to $1.5541, down from $1.5598.

"The US dollar is gaining against all 16 major currencies in a reversion to safe-haven trading," Andrew Busch, global currency strategist at BMO Capital Markets. "Global equities are all bleeding red today in a follow-up to yesterday's very poor U.S. data."

The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,214, -57.59, -0.56%) lost 0.5% in afternoon action. Read about U.S. stocks.

Axel Weber, head of Germany's Bundesbank, said the European Central Bank would likely wait until 2011 to decide whether to begin phasing out short-term, emergency liquidity measures, surprising financial markets.

The European Central Bank had been expected to weigh whether to begin slowly phasing out the range of unlimited short-term loans at its September meeting. Read about Weber's remarks.

Since Weber is viewed as one of the most inflation-focused members of the central bank, the remarks were taken as a signal that officials now will indeed maintain the extra liquidity measures through the end of the year, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.

The remarks may also feed into currency traders' frustration over the euro's inability to break above $1.29, said strategists at Brown Brothers Harriman.

On Thursday, the dollar index jumped by the most since Aug. 11, rallying after weak U.S. jobless-claims and manufacturing reports. Read about dollar on Thursday.

The dollar index stands 0.1% higher this week, adding to a 1.9% rise for the month.

Japan Has Options Short Of Intervention.Currency intervention is not as easy as it used to be. Japan might have to try something else if it decides to rein in the mighty yen.
The euro has fallen 0.3% this week, adding to a decline of 2.6% this month.

Versus the yen, the dollar has declined 0.6% this week, losing 0.9% so far in August.

Since the financial crisis, the dollar and yen have often benefited financial or economic news that pointed toward uncertainty or a weakening outlook for global growth. That dynamic has become somewhat weaker in the last year, as the dollar has sometimes found support from strong U.S. data -- a more traditional relationship. Read about risk appetite in currencies.

Part of the reason that influence on the dollar wanes between the two themes related to changing expectations of how much a slowdown in U.S. growth will weigh on the rest of the globe -- as in the old adage, "when the U.S. sneezes, the world catches a cold."

The other sometimes-winner when risk-averse investors take flight to safety is the Swiss franc. But both the franc and the yen sometimes fall prey to speculation that their respective central banks will intervene in currency markets.

A sharp decline in risk appetite in the wake of data served to bolster the Swiss franc, strategists said, with the euro /quotes/comstock/21o!cur_eurchf (EURCHF 1.3139, -0.0090, -0.6803%) falling 0.5% on Friday to change hands at 1.3158 francs.

The U.S. dollar rose 0.3% against the franc /quotes/comstock/21o!x:susdchf (USDSWF 1.0339, +0.0021, +0.2035%) to CHF1.0354. Still, the Swiss currency has outpaced the dollar since the end of last week when it traded around CHF1.05.

"Two awful U.S. data releases yesterday have undone all of the positive pro-risk vibes associated with GM, BHP and Intel, sparking the return of the safe-haven short-end bid and boosting the attractiveness of the [Swiss franc], even versus the Japanese yen," said Kenneth Broux, senior market economist at Lloyds TSB.

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 ... 2010-08-20