Friday, May 27, 2011

Dollar Wins a Round in the 'Ugly' Contest

Dollar Wins a Round in the 'Ugly' Contest


Faltering U.S. economic growth and gloomy labor market data undercut the dollar, momentarily overshadowing the euro-zone debt crisis.

The "ugly dog" contest in which the dollar has tussled with the euro for the mantle of the least attractive major currency was on full display Thursday, as poor U.S. economic data competed with Europe's sovereign-debt turmoil. Amid fears that Greece will need to restructure its more than $300 billion in debt, investors are grappling with the prospect that the U.S. economy could be decelerating.

Data showed that the economy expanded at a 1.8% pace in the first three months of the year, shy of forecasts. Meanwhile, the number of U.S. workers filing new claims rose more than economists had anticipated.

Although Europe's smaller economies are struggling, the European Central Bank's determination to stamp out price pressures by raising interest rates continues to lure investors to the single currency as an alternative to the dollar.

"At a time when we're headed toward the ending of quantitative easing, the tax of higher oil and commodity prices are having an effect on the economy, and that's contributing to a weak dollar," said Greg Michalowski, chief currency analyst at FXDD.

.Higher euro-zone yields aren't giving as much of a boost to the euro that they did several weeks ago. However, the Federal Reserve's quantitative-easing efforts have undermined the dollar and made the euro more attractive, even as the debt crisis rages on without resolution.

Late Thursday in New York, the euro was at $1.4137 from $1.4084 late Wednesday. The dollar was at ¥81.35 from ¥81.97, while the euro was at ¥115.01 from ¥115.44. The U.K. pound was at $1.6390 from $1.6279. The dollar was at 0.8660 Swiss franc from 0.8728 franc late Wednesday.

Global risk aversion has contributed to a surging Swiss franc, which set a record against the euro Thursday. The euro fell to 1.2242 francs as investors sought a safe harbor from Greece restructuring fears. The strong performance of Switzerland's economy, even in the face of a strong franc, also has enhanced the currency's attractiveness.

While the euro advanced, markets remain on edge about developments in Europe. The euro was briefly knocked lower after Eurogroup President Jean-Claude Juncker said Greece might be denied the next tranche of financial aid if an audit of its budget accounting shows that the country cannot guarantee financing for the next 12 months.

Mr. Juncker's statement undercut the efforts of Germany and the ECB, which have tried to downplay any talk that Greece will have to restructure.

"The rhetoric [in Europe] has all the trappings of a comedy of errors," said Jessica Hoversen, fixed-income and foreign-exchange analyst at MF Global in Chicago. "It decreases credibility and increases uncertainty about how when officials are going to reach" a resolution, she said.

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