Dollar Falls vs Yen as Reports Give Signs of Quickening Inflation in U.S.
By Mark Tannenbaum and Malcolm Foster
Dollar Falls Against Yen, Euro as U.S. Stocks Sink (Update2)
(Updates rates.)
New York, July 29 (Bloomberg) -- The dollar fell to its
lowest level in five months against the yen and to a two-month
low versus the euro as U.S. stocks and bonds tumbled.
A government report showing rising labor costs triggered the
declines, by prompting concern the higher costs will push up
prices on goods and services and force the Federal Reserve to
raise interest rates to slow inflation.
With stocks and bonds falling, ''the feeling is that foreign
investors will be less likely to hold U.S. assets,'' and will
park money in their home currencies, said Tom Benfer, director of
foreign exchange at Bank of Montreal.
The dollar fell as low as 114.92 yen, its weakest level
since Feb. 15. It traded recently at 115.48 yen, down from the
115.90 yen level where it traded in New York yesterday afternoon.
The U.S. currency matched a low of $1.0743 per euro, reached May
14. The dollar recently traded at $1.0724 per euro, from $1.0662
yesterday.
With today's drop, the dollar has now tumbled 7.2 percent
against the yen since reaching a high for the year of 124.32 yen
on May 20. Against the euro, it has fallen 6.2 percent since
touching a high of $1.0108 per euro on July 13.
The Employment Cost Index rose 1.1 percent, faster than the
0.8 percent jump economists had forecast, even as the government
reported slower second quarter growth in gross domestic product
than economists expected.
The U.S. economy grew at a 2.3 percent annual rate in the
second quarter, the government said, slower than the 3.4 percent
rate forecast. The GDP price deflator, a measure of inflation,
rose at an annual rate of 1.6 percent in the quarter, faster than
the 1.5 percent expected.
The 30-year Treasury fell, driving the bond's yield up 6
basis points to 6.07 percent. The Dow Jones Industrial Average
fell 181 points, or 1.65 percent, to 10,791.
While higher U.S. interest rates tend to boost the dollar by
making dollar deposits more attractive, that was outweighed as
declining stocks and bonds dragged down the U.S. currency.
''Today's reaction confirms that the dollar is trading with
asset prices rather than yields,'' said Anne Parker Mills, senior
currency economist at Brown Brothers Harriman & Co.
Industrial Production
A stronger-than-expected Japanese industrial production
report also contributed to the dollar's decline against the yen.
The report bolstered hopes the world's second largest economy is
on the rebound, sparking expectations investors will keep
shifting funds to Japan.
''The yen is getting stronger because the economic numbers
are coming out better than expected,'' said Anjum Sayyed, a
trader at Manufacturers & Traders Trust in Buffalo. ''There's a
ton of money flowing into Japanese equities and the Japanese
economy is beginning to turn.''
Japanese industrial output rose at its fastest rate in 29
months in June, the Japanese government said today. Output rose 3
percent in June, better than the 1.8 percent increase forecast by
economists.
The report initiated a rally in Japanese stocks and pushed
up bond yields, spurring demand for the yen to buy securities.
The Nikkei-225 stock average rose 1.65 percent today, and is up
29 percent since Jan. 1.
''There are definite flows going back into Japan, supporting
the yen,'' said Simon Lue-Fong, who helps manage $15 billion at
Fischer Francis Trees & Watts in London. He said he expects the
yen to gain more against the dollar in the coming days.
Still, the dollar bounced back from its lowest level today
against the yen, partly out of concern the Bank of Japan may
intervene and sell the Japanese currency, said Marc Chandler, a
currency strategist at Mellon Bank.
The Bank of Japan has sold yen seven times since June 10,
the same day the Japanese government reported stronger-than-
expected growth for the January-March quarter. Japan is worried a
stronger yen will hurt exports and slow the country's recovery
from recession.
BOJ Governor Masaru Hayami said Monday that while the
economy has stopped declining, no immediate recovery in private
demand is in sight. As a consequence the BOJ will keep overnight
interest rates near zero percent, he said.
French Manufacturing
The dollar's weakening against the euro also comes as a
report today showed French manufacturing confidence rose to its
strongest level in 10 months, supporting analysts saying a
recovery is under way in the euro region.
''Everything's pointing to a pickup in activity on the
continent,'' said Chandler at Mellon Bank. For U.S. investors,
the ''next move will be readjusting portfolios in favor of
European stocks,'' and that will boost the euro in coming months.
In other trading, the British pound rose to $1.6180 from
$1.5971 yesterday. The dollar fell to a two-month low of 1.4880
Swiss francs from 1.4987 yesterday, and was little changed at
1.5062 Canadian dollars from 1.5080.
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