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Dollar ends week lower as euro zone exits recession

Published: 13/11/2009 05:00

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The dollar ended the week lower against major currencies as a growth of the euro zone economy boosted investors’ risk appetite, which lacked support in previous sessions.

Gross Domestic Product (GDP) increased by 0.4 percent in the euro zone, and by 0.2 in the 27-nation European Union (EU) during the third quarter of 2009, according to Eurostat, the statistical office of the European communities.

The two largest economies in the euro zone, Germany and France, grew by 0.7 percent and 0.3 percent respectively in the third quarter, Eurostat said on Friday.

The 0.4 percent growth of the euro zone GDP, slightly less than expected, showed that the 16-nation zone emerged from its first recession since the single currency was unveiled in 1999. It ended a series of contractions in five consecutive quarters.

The euro zone slipped into recession in the third quarter of 2008, showing two consecutive quarters of negative growth. Its GDP contracted by a massive 2.5 percent in the first quarter of 2009 before showing signs of bottoming out.

The dollar “still remains on the strong side” despite its declines in recent months, the International Monetary Fund (IMF) said in a report. The comments suggested that the dollar could fall further.

There are indications that the dollar is now serving as the funding currency for carry trades. These trades may be contributing to upward pressure on the euro and some emerging economy currencies, the IMF said.

In carry trades, investors sells a certain currency with a relatively low interest rate and use the funds to purchase a different currency yielding a higher interest rate.

Benchmark rates of the United States have been kept at a range between zero and 0.25 percent, lower than other major economies. Economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period, said the U.S. Federal Reserve in a statement from its latest monetary policy meeting.

The dollar opened lower this week as a commitment from Group of20 (G20) policymakers boosted hopes for recovery. The G20 finance ministers and central bank governors, who met last Saturday in Scotland, agreed to maintain support for the recovery until it is assured by efforts to restore the global economy.

The dollar’s declines took a break in mid-week trading as there were few U.S. economic reports released. Trade volume has been light because of the Veterans Day holiday on Wednesday.

The pound fell against the dollar on Wednesday after British Central Bank Governor Mervyn King said he was open on whether to pump more money into the economy.

The British economy had “only just started” along its road to economic recovery, King said.

The Bank of England expected the British economy to return to growth at the beginning of next year, and it would be late 2011 before the economy recovered to the pre-recession level.

The British currency rebounded on Thursday as some analysts said it was still undervalued.

Declines of the dollar sparked some worries that rising oil prices could hurt consumer spending and hinder economic growth. Appreciation of the currencies of other countries, especially emerging economies, dampens their export. This would also threaten a global recovery.

The Asia-Pacific Economic Cooperation (APEC) finance ministers who met in Singapore on Thursday promised to undertake monetary policies consistent with price stability in the context of market-oriented exchange rates that reflect underlying economic fundamentals, according to a joint statement.

The dollar strengthened on Thursday amidst the APEC statement and a report showing that U.S. oil inventories had jumped.

The Energy Information Administration of the U.S. Department of Energy reported an increase of 1.8 million barrels in crude stocks and a rise of 2.5 million barrels in gasoline inventory last week. The numbers are both higher than analysts’ forecast.

Safety-haven demand for the dollar edged higher on Thursday as the EIA report showed that oil demand was not as good as expected. The demand faded on Friday amidst the euro zone GDP report.

The euro bought 1.4893 dollars in late Friday New York trading, about 0.4 percent higher than a week ago. The pound rose 0.4 percent to 1.6672 dollars.

The dollar fell 2.3 percent during the past week to 1.0517 Canadian dollars, and fell 0.4 percent to 1.0135 Swiss francs. It fell 0.3 percent to 89.63 Japanese yen.

VietNamNet/Xinhuanet

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