Dollar Rises Against Euro as U.S. Yield Advantage Boosts Demand

March 18 (Bloomberg) — The dollar rose the most against the euro in more than a month as the advantage in U.S. bond yields boosted demand for the currency.

March 18 (Bloomberg) — The dollar rose the most against the euro in more than a month as the advantage in U.S. bond yields boosted demand for the currency.

Gains in the dollar accelerated after it advanced past $1.33 per euro, a level some traders said may indicate further increases. The slump this week in emerging market stocks, currencies and bonds also prompted investors to buy dollar- denominated assets, traders said.

“Having a 10-year Treasury note around 4.5 percent helps” the dollar, said Meg Browne, currency trader at Brown Brothers Harriman & Co. in New York. “Declines in emerging markets also sparked demand for the U.S. currency.”

Against the euro, the dollar rose 0.5 percent to $1.3316 as of 1:01 p.m. in New York, from $1.3377 yesterday, according to electronic currency-dealing system EBS. It also rose to 104.74 yen from 104.54. Browne said the dollar may rise as far as $1.32 per euro in coming days.

For the week, the dollar is 1.1 percent higher against the euro, the biggest gain since the week ended Feb. 4. The dollar is 0.7 percent higher versus the yen this week.

The dollar held its gains even after a survey by the University of Michigan showed U.S. consumer confidence waned this month from February. A government report earlier today showed prices of goods imported to the U.S. rose the most since October, reinforcing expectations the Federal Reserve will raise interest rates next week.

Fed-ECB Rate Gap

A wider rate gap with Europe also is fueling demand for dollars. The Fed will probably lift its target rate for overnight lending on March 22, for the seventh increase since June, lifting the return on dollar-based deposits. An increase would put the Fed’s rate 0.75 percentage point over the comparable European Central Bank rate, the widest difference in four years.

Rising Treasury yields also whet the appetite of foreign investors. The yield on the U.S. benchmark 10-year note on March 14 traded at a seven-month high of 4.58 percent, increasing the attraction of U.S. Treasuries relative to other government bonds. It has since fallen back 9 basis points, or 0.09 percentage point, to 4.49 percent.

Two-year U.S. Treasury note yields widened to 1.31 percentage points more than comparable German debt earlier this week, a four-year high.

“If the Fed continues to raise rates by 25 basis points every meeting, then we will get a 2 percent gap with Europe and that will be significant,” said Momtchil Pojarliev, senior currency manager in London at Invesco Asset Management, which invests about $80 billion in fixed-income assets. “I am more bullish on the dollar.”

`Enticing Money’

The Fed, which raised interest rates in quarter percentage- point increments six times since June, will do so again at its March 22 monetary policy meeting, according to the median estimate of 92 economists surveyed by Bloomberg News.

The Fed’s target overnight rate is 2.5 percent and expected to reach 3.75 by year-end, based on the median estimate in a Bloomberg survey of economists. The European Central Bank’s comparable rate is 2 percent.

“Rising U.S. interest rates are finally coming to support the U.S. dollar by enticing money back into the U.S.,” said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. “That’s a classic phenomenon we normally see as the Fed raises interest rates, but had not been seen so much in this tightening cycle. It’s dollar-positive.”

The dollar may gain to $1.325 per euro and 105.50 yen next week, Ikezawa said.

Emerging Markets

Emerging market bonds rose today, recovering some of their losses after the worst week in almost a year. The yield spread for such bonds widened 24 basis points so far this week, JPMorgan’s EMBI+ benchmark shows, the biggest increase since the week ending May 6. Wider spreads mean investors perceive more risk in owning emerging market bonds relative to the safety of U.S. Treasuries.

Emerging-market stocks fell yesterday, with Egypt’s CASE 30 Index leading declines, sinking 6.3 percent. Morgan Stanley Capital International Inc.’s Emerging Markets Index of stocks is down 3.4 percent this week, and mutual funds investing in emerging European, Middle Eastern and African stocks had their first weekly outflow of money in three months.

“When you get emerging markets under pressure, money tends to flow back into dollars,” said Ian Gunner, head of currency research in London at Mellon Financial Corp., which oversees about $700 billion in assets. “There is always some residual support for the currency.”

The yen also fell for the week, as oil traded near a record high, raising speculation it may stall economic growth in Japan, which imports almost all of its petroleum. Finance Minister Sadakazu Tanigaki said the government “must closely watch oil prices because they affect the cost of various materials.”

Crude oil slipped after touching records yesterday on speculation that output will lag demand. Prices in New York rallied as much as 5.8 percent this week to an all-time high of $57.60 a barrel yesterday.

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