Dollar slides as Europe returns to calm, for now

AP News
Posted: Aug 15, 2011 3:52 PM
Dollar slides as Europe returns to calm, for now

The dollar slid as investors favored assets considered riskier, such as stocks, even as manufacturing and investment reports in the U.S. showed some weakness.

A report on New York manufacturing Monday suggested that activity has worsened in the region for the third month in a row.

That doesn't exactly line up with hopes that the U.S. economy will bounce back any time soon, said David Watt, a currency strategist with RBC Capital in Toronto.

Still, investors bought up stocks after the recent upheaval in world stock markets. Big acquisitions by major companies also helped boost investors' taste for stocks and riskier currencies, despite concerns about the U.S. economy.

Meanwhile, investors hoped that a key summit of French and German leaders Tuesday will work on building a more lasting solution to Europe's debt crisis. Worries about European governments defaulting on their debts have overshadowed the euro bloc for more than a year and a half.

France and Germany are the 17-nation euro group's economic powerhouses. They are pushing for reforms aimed at pulling the region out of its debt crisis.

In afternoon trading in New York, the euro rose to $1.4451 from $1.4245, the British pound gained to $1.6389 from $1.6280 and the dollar fell to 98.11 Canadian cents from 99.04 cents.

The dollar was almost unchanged at 76.78 Japanese yen from 76.75 yen.

Dollar selling accelerated after the U.S. government released a report Monday morning showing that foreign investors had turned away from U.S. assets in June, for the first time since April 2009. In June, investors were growing increasingly wary that U.S. politicians would not find a way to make a deal that would lift the government's borrowing limit, leaving the U.S. at risk of defaulting on its debts.

The government reached a deal at the last minute that included plans to cut the deficit. Ratings agency Standard & Poor's still cut the U.S. credit rating from AAA to AA+, saying spending cuts fell short. The group questioned the politicians' will to find solutions to high debt levels.

Heavier demand for U.S. assets such as Treasurys and corporate bonds would suggest that investors from overseas want more dollars to buy those assets.

The sales by foreigners of U.S. Treasurys, considered to be among the world's safest investments, underscored concerns about U.S. deficits, said Bank of New York Mellon currency analyst Michael Woolfolk.

The dollar extended recent gains on the Swiss franc, trading at 0.7843 franc from 0.7767 late Friday. The Swiss franc had shot up more than 30 percent against the dollar this year, with the dollar hitting a record low of 0.7062 on Tuesday. The Swiss currency had also been rapidly approaching parity with the euro. That prompted the Swiss central bank to act to weaken its currency. Reports that the Swiss National Bank is planning to set a peg for the currency value against the euro weakened the franc further.

The Swiss franc, like gold and the Japanese yen, tends to gain on a "safe-haven" bet when investors are wary of threats to global economic growth. Recent financial tumult in Europe and the U.S., the earthquake and tsunami in Japan and geopolitical tensions in the Middle East have helped drive up the value of all three this year.