The Euro Scrapes Lows Against the Dollar as U.S. Assets Appeal
May 22, 2007 - International Herald Tribune
The Euro Scrapes Lows Against the Dollar as U.S. Assets Appeal
NEW YORK -- The euro fell to its lowest level in more than five weeks against the dollar Monday after the yield differential between 10-year U.S. notes and similar-maturity German debt widened, enhancing the appeal of U.S. assets.
"We've had a sharp rally in U.S. yields favoring the dollar and prompting the market to consolidate the euro at slightly lower levels," said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.
The difference in yields between 10-year Treasury notes and comparable German bunds is 48 basis points. It reached 49 basis points on May 18, the highest since April 18. The spread has widened about 8 basis points since May 15.
"The euro-dollar was so grossly overbought that at this point the unwind is quite natural," said Boris Schlossberg, a strategist at DailyFX.com.
At 4 p.m., the euro fell to $1.3470 from $1.3512 late Friday.
In other currency trading, the dollar rose to ¥121.445 from ¥121.083 and the pound eased to $1.9709 from $1.9752. The dollar climbed to 1.2303 Swiss francs from 1.2271 francs.
The yen was lower as traders borrowed yen to buy other assets abroad.
"The carry trade continues unabated for the time being," said Schlossberg. "The market's risk appetite has almost turned into gluttony."
The yen fell against 14 of 16 most-active currencies after Asian stock markets reversed their declines and equity indexes in the United States gained.
Volatility on one-month yen options versus the dollar fell to 6.35 percent, from 6.5 percent Friday and 7.58 percent a month earlier. Lower volatility reduces the currency risk involved in carry trades.
In China, the yuan was little changed at 7.6661 versus the U.S. currency Monday. The People's Bank of China raised the one-year benchmark lending rate to 6.57 percent on Friday. China also widened the yuan's daily trading band against the dollar to 0.5 percent from 0.3 percent, which allows the currency to gain faster.
"The market shrugged the Chinese policies off," Dolan said, since they did not increase volatility.
The Swiss franc eased as investors bet that borrowing costs in Switzerland will rise at a slower pace than the key rate in the euro zone.
The franc and the Japanese yen are favorites among carry trade investors who borrow at relatively low interest rates to buy higher yielding assets.
"It looks like the franc is being penalized for having relatively low interest rates," said Paul Robson, a strategist at Royal Bank of Scotland. "The Swiss economy is robust and interest rates there will rise further. The problem is rates are rising elsewhere in Europe, and at a faster pace."
