Future Business

The dollar fell the most against the euro in two months and approached its lowest level this year on speculation a deterioration of U.S. creditworthiness will make assets such as Treasuries less attractive to investors.

The yen touched a nine-week high versus the dollar yesterday after Japan’s Finance Minister Kaoru Yosano said the government won’t intervene in the currency market and the Bank of Japan raised its economic assessment. The dollar posted its biggest weekly drop versus the euro since March after Pacific Investment Management Co.’s Bill Gross said this week the U.S. will “eventually” lose its AAA credit rating.

“We’ve been seeing an increased speculative push,” said Michael Woolfolk, New York-based senior currency strategist at Bank of New York Mellon Corp., in an interview on Bloomberg Television. “There is some concern about perhaps the credit rating, the creditworthiness of the U.S., particularly from other corners of the world such as China.”

The dollar slid 3.7 percent to $1.4013 per euro, from $1.3494 on May 15, tumbling yesterday to $1.4051, the weakest level since Jan. 2. It was the biggest weekly drop since March 20, when it plunged 4.8 percent. The dollar lost 0.4 percent to 94.79 yen from 95.21. The euro gained 3.4 percent to 132.80 yen from 128.43 at the end of last week.

A rout in Treasuries pushed the yield on the benchmark 10- year note up 32 basis points, or 0.32 percentage point, to 3.45 percent. It was the biggest increase since June 2008.

Credit-Default Swaps

The cost to hedge against losses on U.S. government bonds for five years climbed to a three-week high yesterday, indicating perceptions the nation’s credit quality is deteriorating. Credit-default swaps on U.S. debt rose 3.5 basis points to 41, the highest since April 29, according to prices from CMA Datavision in New York.

“The markets are beginning to anticipate the possibility” of a U.S. credit rating cut, said Gross, co-chief investment officer of Newport Beach, California-based Pimco, in an interview on May 21 on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”

The administration of President Barack Obama will probably sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

Treasury Secretary Timothy Geithner said in a May 21 interview on Bloomberg Television that he’s committed to reducing the federal budget deficit to 3 percent of gross domestic product or less, compared with a projected 12.9 percent this year.

U.S. debt is far below a level that would trigger a downgrade, Woolfolk said.

Canadian Dollar

The dollar dropped this week against all of the 16 most actively traded currencies tracked by Bloomberg. The Canadian dollar advanced to C$1.1198, the strongest level since Oct. 9, while New Zealand’s currency climbed to 62.38 U.S. cents, the highest level since Oct. 21. The Australian dollar reached 78.67 U.S. cents, the highest level since Oct. 2.

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 3.6 percent to 80.025 after touching 79.805, the lowest level since Dec. 29. The gauge of the greenback dropped 11 percent from a three-year high reached on March 4.

“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Bank, wrote in a research note yesterday.

Fed’s Debt Buying

The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced plans to buy up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy. The central bank’s target range for overnight loans between banks is zero to 0.25 percent.

Some Fed policy makers indicated at the April 28-29 policy meeting that the central bank might have to increase its purchase of assets should the economy or financial markets deteriorate further, minutes released this week showed.

Japan’s currency posted a thirdly weekly gain versus the greenback after Finance Minister Yosano said the “government isn’t considering currency intervention at this point.”

Waning global sales and a 10 percent gain in the yen versus the dollar in the past year hurt exporters including Toyota Motor Corp. Central banks intervene by buying or selling currencies to influence exchange rates.

Bank of Japan

The Bank of Japan kept its target lending rate at 0.1 percent at the end of its policy meeting yesterday and raised its economic assessment for the first time since July 2006. The central bank also said it will accept foreign debt owned by banks as collateral for loans.

The euro pared gains against the dollar yesterday after Luxembourg Finance Minister Jean-Claude Juncker told Reuters extended advances in the 16-nation currency would hamper a recovery in the region’s economy.

The dollar may rise against the euro after the greenback’s plunge created a “lose-lose situation” for the U.S., Europe and other countries, according to Barclays Capital Inc.

“While sentiment has become very negative toward U.S. bonds and the U.S. dollar, this sell-off does not seem to have benefited anyone,” wrote Steven Englander, chief U.S. currency strategist at Barclays, and Aroop Chatterjee, a colleague, in a research note yesterday.