Dollar Snaps Winning Streak As Risk Comes Back

The dollar ended its three-day winning streak Wednesday, as stocks rose and investors moved back into assets with greater exposure to risk.

The move came even as concerns lingered over sovereign debtloads after Standard & Poor's Corp. lowered its ratings outlook on Spain to negative, saying the country will probably see "significantly lower" gross domestic product growth and "persistently high fiscal deficits relative to peers."

In contrast to the pattern seen earlier this week, the dollar failed to garner a safe-haven bid, as investors sought alternatives to both the euro and dollar, with the yen deemed the safest currency bet.

"The fact that we didn't get any more negative follow-through from the Spain news suggests that we're back to this risk trading," with the euro gaining as stocks rise, said Jacob Oubina, currency strategist at Forex.com in Bedminster, N.J.

On Wednesday afternoon the euro was at $1.4725 from $1.4698 late Tuesday, according to EBS via CQG. The dollar was at Y87.80 from Y88.36, while the euro was at Y129.30 from Y129.87. The pound was at $1.6260 from $1.6276. The dollar was at CHF1.0266 from CHF1.0273.

The Dollar Index, which tracks the dollar's value against a trade-weighted basket of six currencies, was at 76.043 from 76.236.

Higher-yielding currencies including Canada and Australia rallied on the day, underscoring the fact the popular trade centered on moving into riskier assets and away from the dollar remains very much a market force. That strategy had been thrown into question by the November U.S. employment report, which fueled expectations that the Federal Reserve might raise interest rates faster than anticipated.

"This idea that the dollar is getting ready to move in line with more traditional growth and interest rate fundamentals, and away from this so-called risk trade may not be happening yet," said Robert Lynch, currency strategist at HSBC in New York. "The risk trade is still an important influence over these dollar movements."

The yen was the biggest beneficiary of investors' concerns over sovereign credit, and even as sentiment turned in favor of higher-yielding currencies in New York trading, the Japanese currency held onto its gains. Japan has its own fiscal issues, but these shortcomings are widely known and have long been priced into the currency, whereas worries about the long-term fiscal position of the U.S. have more recently surfaced. Therefore, the yen proved more attractive as a safe haven, said analysts.

The pound fell sharply before retracing much of its loss by late afternoon, in the aftermath of the U.K. Chancellor of the Exchequer Alistair Darling's Pre-Budget Report to Parliament as investors reacted in disappointment to his presentation. Darling's predictions that the U.K. economy would grow 1% to 1.5% in 2010 were seen as overly optimistic, analysts said.

The euro had been under pressure during much of the day after S&P switched Spain's outlook.

"The market doesn't like it at all," Sebastien Galy, currency strategist at BNP Paribas in New York, said of the concerns over sovereign debt. "Until we see some cleanups in balance sheets, the world is quiet rightfully concerned."

Still, the common currency managed to garner support from rising U.S. stocks late in the day.

During Wednesday's session, currencies took unusually steep swings up and down. The pound traded between an intraday high at $1.6375 and a low at $1.6170.

"[Darling's] projections for GDP were seen as somewhat overly optimistic, so his forecast for deficit reductions become a little bit suspect," said Omer Esiner, senior market analyst at Travelex Global Business Payments.

"If we see actual growth in the U.K. underperform those forecasts, then it suggests that the budget deficit and the dire state of public finances will continue to be an issue," he said.

Separately, analysts at JP Morgan said the improving growth backdrop and fading of downside risks in Switzerland has encouraged the Swiss National Bank to emphasize that it doesn't view its current monetary stance as appropriate indefinitely, and could signal changes in its stance at its policy meeting Thursday.

"We think the SNB will use tomorrow's December policy meeting to announce that it is starting to remove some of its unconventional policy measures," JP Morgan said.

Meanwhile, New Zealand's central bank Thursday kept the Official Cash Rate at a record low 2.50% but said it may remove monetary stimulus around mid-2010. The New Zealand dollar gained more than 1.5% against the U.S. dollar by late afternoon.