Dollar Reverses Decline As Demand For Risk Wilts





The dollar reversed its overnight decline Monday, with the euro and the U.K. pound slipping into negative territory versus the greenback as demand for stocks and other riskier assets wilted.

The euro's advance against the pound drove sterling lower in late morning trading, said Steve Butler, director of foreign exchange at Scotia Capital in Toronto. The pound is vulnerable because of continuing concerns about Britain's fiscal situation, Butler said.

The euro continued to hover just above the CHF1.4620 area agains the Swiss franc, near the levels suspected of prompting intervention by the Swiss National Bank to weaken the franc in the past.

Monday morning, the euro was at $1.3615 from $1.3620 late Friday and down sharply from a high at $1.3705 in overnight trading. The euro was also at Y122.95 from Y123.04 late Friday. The dollar was at Y90.26 from Y90.33. The dollar was at CHF1.0742 from CHF1.0742. The pound was at $1.5055 from $1.5152.

The ICE U.S. Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 80.468 from 80.571.

Demand for risk whetted by the strong U.S. jobs report Friday, favorable developments in Greece and positive data from Japan had lifted the euro and other risk sensitive currencies earlier Monday.

"We walked in this morning and the world was a very, very safe place," said Scotia's Butler.

But investors' enthusiasm for risk was undermined by news the New York Federal Reserve will expand the set of counterparties that it can use to help it drain cash from the financial system when the time is right, Butler said.

Such measures, though necessary, will likely continue to unnerve the market by reminding traders the U.S. central bank is moving towards normalizing monetary conditions, he said.

A reminder of the strength of the U.S. economy came with the payrolls data for February on Friday, which showed the number of jobs falling by only 36,000 last month instead of by the 75,000 expected. The employment report has tended to favor risk- and growth-sensitive assets, although currencies haven't been shaken from recent ranges.

Over the weekend, French President Nicholas Sarkozy helped provide the reassurance the market had been seeking that other euro-zone countries will come to Greece's aid.

After talks in Paris Sunday with Greek Prime Minister George Papandreou, the French president said major euro-zone members will do what is needed to ensure that Greece isn't isolated and that precise measures for helping the country are being discussed.

Other reports indicated key euro-zone countries are considering the creation of a European equivalent to the International Monetary Fund.

A German Finance Ministry spokesman said Monday the proposal by German Finance Minister Wolfgang Schaeuble to set up a European Monetary Fund in light of Greece's financial problems isn't a short-term measure but should be seen as a topic for general discussion.

The EMF proposal isn't designed to solve the Greek issue in the short term but is more of an overall concept, the spokesman said.

German Chancellor Merkel said the European monetary fund idea was "good and interesting" late Monday morning, and said Greec is not facing an emergency situation now.

Currency strategists at ING in London said the Greek issue may take a backseat for a few weeks, noting that the EcoFin group of European finance ministers will likely approve Greece's austerity plan on March 16.

ING said it suspects international investors will be reluctant to chase the common currency too high against the dollar.

Any recovery for the euro may also prove to be limited given that the euro-zone recovery could lag well behind that of the U.S. and ensure that the euro remains unattractive on a yield basis.

Japan also provided good news, reporting that its current-account surplus for January was sharply higher at Y899.8 billion as exports continued to rise. The market had been looking for the surplus to come in lower, at Y783.9 billion.

Elsewhere, China stirred speculation of an early yuan appreciation with its latest suggestion that the currency peg could be adjusted.

People's Bank of China Governor Zhou Xiaochuan said: "This is a part of our package of policies for dealing with the global financial crisis. Sooner or later, we will exit the policies."

A higher yuan could be helpful for the Japanese economy by making Chinese exports less competitive.

However, the implied tightening in Chinese monetary policy and the likely decline in Chinese demand means that commodity currencies, which have been benefiting from China's strong growth, could suffer.