Dollar May Extend Drop on Concern December Rally Unsustainable

Dec. 25 (Bloomberg) -- The dollar declined against the euro on speculation its biggest December rally since the European currency’s 1999 debut is unsustainable.

South Africa’s rand was the best performer versus the dollar yesterday among the 16 most-traded currencies tracked by Bloomberg as gold and other precious metals rallied as the dollar dropped.

“The market has got too far in terms of buying dollars, looking for higher rates,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group Inc. in Greenwich, Conn.

The dollar was at $1.4371 per euro at 5:03 a.m. in Tokyo, after losing 0.2 percent yesterday and appreciating to $1.4218 on Dec. 22, the strongest level since Sept. 4. The dollar was at 91.56 yen, after a 0.1 percent drop yesterday. The euro was little changed at 131.55 yen.

The yen was headed for a 5.6 percent drop against the dollar this month, the biggest since February.

Japanese consumer prices excluding fresh food fell 1.7 percent from a year earlier in November, according to the median estimate of 25 economists in a Bloomberg survey before the release of figures today.

Bank of Japan Governor Masaaki Shirakawa said in an interview with TV Tokyo this month that the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation.

The U.S. currency has gained 4.4 percent versus the euro in December, paring its 2009 drop to 2.8 percent as signs that the U.S. economic recovery is gaining momentum prompt investors to take off bets against the currency.

Dollar Shorts

“Most of the dollar shorts that were vulnerable have been cleared out over the last four weeks, which has given a more balanced feel to markets,” Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto, wrote in a research note to clients yesterday. A short position is a bet an underlying security will decline.

Hedge funds and large speculators almost halved bets this month that the dollar will drop against its major rivals, according to data compiled by the Commodity Futures Trading Commission in Washington.

Wagers that the dollar will depreciate against eight currencies, including the euro, yen and pound, outnumbered those on its gain by 136,563 contracts as of Dec. 15, compared with about 250,000 at the end of November.

The franc traded at almost a nine-month high against the euro on speculation the Swiss National Bank will refrain from trying to limit its currency’s gains.

Swiss Franc

The Swiss currency fetched 1.4913 per euro after reaching 1.4850 four days ago, the strongest level since March 12. On that day, the central bank bought foreign currency to limit the franc’s appreciation and support Switzerland’s economy.

Goldman Sachs Group Inc. strategists said on Dec. 23 that they were “stopped out” of a bet that the franc would fall against the Swedish krona. Investors who followed Goldman Sachs’s recommendation initiated in July would have lost about 3.7 percent, the strategists wrote in an e-mail message.

Traders typically place stop losses at levels to protect themselves when a bet moves in the opposite direction.

The rand gained as much as 1.8 percent to 7.4732 versus the dollar, the strongest level in a week, as a rally in gold and platinum boosted earnings prospects for South Africa, the world’s biggest producer of precious metals.

Bullion futures increased 1 percent to $1,104.80 an ounce as the drop in the dollar encouraged investors to buy precious metals as an alternative investment. Platinum climbed 2.9 percent to $1,474 an ounce.