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Thursday April 30, 2009 - 10:16:48 GMT
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FOREX NEWS-Dollar pressured, optimism improves risk demand

Thu Apr 30, 2009 5:53am EDT

* Dollar index falls to 3-week low, demand for risk rises

* U.S. data suggests economy will recover later this year

* Investors less wary of swine flu, Chrysler crisis (Adds comment, updates prices)

By Naomi Tajitsu

LONDON, April 30 (Reuters) - The dollar fell broadly on Thursday, hitting a three-week low against a basket of currencies as speculation the global economic downturn is slowing continued to raise demand for riskier assets.

The euro climbed along with high yielders as investors looked beyond a weak headline reading of U.S. growth and focussed on signs the economy may soon pick up, an outlook suggested by the Federal Reserve in its policy statement on Wednesday.

This kept intact a broad, ongoing improvement in market sentiment and risk demand, which analysts said would continue so long as economic data does not significantly alter the view that the global economy is starting to show signs of recovery.

Concerns about the spread of swine flu waned on the view that the disease thus far would have limited economic impact, and a report of an imminent bankruptcy filing by Chrysler did little to stifle the risk rally, with analysts saying that markets have already priced in the U.S. automaker's failure.

"People are happy to romance the idea that maybe policymakers are gaining traction and maybe the global economy has at least got past the low point," said Paul Robson, strategist at RBS in London.

"Risk continues to build over the next month or so and that will play as dollar negative," he said, while cautioning that risk demand was based more on "hope than reality".

A rise in euro zone unemployment to 8.9 percent in March from an upwardly revised 8.7 percent in February underlined the view that the euro zone economy remains weak, although the single currency showed limited initial reaction to data.

Other data showed that euro zone inflation remained at a record low of 0.6 percent year-on-year in April [ID:nBRQ007306]

The dollar index .DXY, which tracks the U.S. currency's performance against the nation's biggest trading partners, was 0.5 percent lower at 84.259 by 0923 GMT, having fallen as low as 83.885, its lowest since early April.

Losses in the index were driven by a 0.4 percent climb in the euro to $1.3370 <EUR=>, which rose as high as around $1.3385 in early trade to hit its strongest in more than two weeks, boosted by a 2 percent rise in European shares .FTEU3.

Analysts said that losses in the dollar were also being driven by investors pulling out of U.S. government debt, which has pushed the 10-year U.S. Treasury yield <US10YT=RR> to its highest level since late November.

"The rise in yields is triggering some speculation that (higher yields are) running against the interests of the major buyers of Treasuries, which are central banks, an in particular, the Chinese," said Michael Klawitter, senior forex strategist at Dresdner Kleinwort in Frankfurt.

The dollar <JPY=> inched up 0.2 percent to 97.75 yen. The yen suffered as traders dumped safe-haven positions taken out earlier in the week, when uncertainty over the possible impact of swine flu had sparked higher risk aversion.

Higher-yielding currencies rose, with the Australian <AUD=D4> and New Zealand <NZD=D4> dollars each gaining as much as roughly 1.5 percent against the dollar, while climbing around 1 percent against the Japanese currency.


Despite the New Zealand currency's rise against the dollar and the yen, it fell against its Australian counterpart <AUDNZD=R> after the central bank cut interest rates by 50 basis points to a record low 2.5 percent and pledged to keep them low.

The Bank of Japan kept rates unchanged at 0.1 percent and stood by its forecast for economic recovery by early next year [ID:nT277157].

Demand for risk rose after the Federal Reserve tweaked its policy statement to say that the economic outlook was improving, while vowing to keep interest rates at a historic low for a long stretch [ID:nN29410693].

The U.S. central bank's stance was consistent with data showing that the U.S. economy remained on track to improve later this year despite a surprisingly steep 6.1 percent fall in national activity in the first quarter.

Analysts said a record plunge in business inventories suggested that production would have to rise in coming months to fill the inventory gap.

Market participants were watching Chrysler's last-ditch efforts to avoid bankruptcy ahead of a government-imposed restructuring deadline later in the day [ID:nLT878745]. The Wall Street Journal reported that those efforts had hit a roadblock, and bankruptcy was "all but certain".

(Reporting by Naomi Tajitsu; Editing by Toby Chopra)

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