The dollar fell against major currencies on Wednesday as increased expectations that the US economy was recovering dampened safe-haven demand for the greenback. The Swiss franc, meanwhile, fell against the euro on speculation the Swiss National Bank (SNB) may have intervened to weaken its currency. The SNB declined comment on the franc's price action.
Data showing the US economy contracted in the second quarter more slowly than initially thought kept the euro and sterling firm, while the higher-yielding Australian and New Zealand dollars rallied. The foreign exchange market shrugged off a September Midwest manufacturing report that showed factory activity fell unexpectedly.
"Markets are still very optimistic," said Kathy Lien, director of currency research at GFT Forex in New York. "That's helping ease safe-haven flows out of the dollar and continue to benefit the high-yielding currencies." She said the revised gross domestic product figure "indicates that the United States is pretty much emerging out of recession and there's a very good chance that we are going to see positive GDP growth in the third quarter."
In late New York trading, the euro rose 0.3 percent to $1.4631, on track for a quarterly gain of 4.3 percent. The dollar fell 0.4 percent to 89.77 yen and has dropped 6.8 percent in the third quarter. Traders said losses in the dollar have been compounded by quarter-end flows related to foreign portfolios. Since both the US stock and bond markets rose in the third quarter and boosted foreign funds' dollar holdings, managers needed to sell dollars to maintain hedge ratios at the end of the quarter.
GFT's Lien added that for the last couple of days, the dollar had benefited from flows related to repatriation of profits by US companies. The weakness in the dollar this quarter likely has boosted foreign earnings of US firms. "Now we're in the last trading day of the quarter ... we're seeing the flow being reversed and the dollar continues its downtrend," she said.
PATH TO RECOVERY: The ICE Futures dollar index, which tracks the greenback versus a basket of six currencies, was down 0.5 percent at 76.731. The index was down 4.3 percent in the quarter and was 1.8 percent weaker in September. The US economy contracted at a 0.7 percent annual rate in the second quarter, instead of the 1.0 percent decline reported last month, the Commerce Department said. It's probably the last quarter of falling output for the US economy, which is believed to have rebounded in the July-September quarter.
Separately, the Institute for Supply Management-Chicago said its business barometer fell to 46.1 in September from 50.0 in August. The 50 mark is the dividing point between contraction and growth. In another report, a survey by ADP Employer Services showed private companies slashed 254,000 jobs in September, more than the 210,000 layoffs expected but down from the 277,000 jobs lost in August. "There has been some stabilisation in the US economy," said John McCarthy, director of foreign exchange at ING Capital Markets in New York. "But at the end of the day, we still need to see jobs being created ... for growth to be sustained."
Atlanta Federal Reserve Bank President Dennis Lockhart said on Wednesday that the US economy is starting a tentative recovery but it is too early to embark on a full-on exit from the Federal Reserve's accommodative policies. "The sentiment is still dollar negative," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. "Until (there's) any larger correction in the stock market, as we continue to be in a recovery mood, I think the dollar is going to continue losing its value."
Against the Swiss franc, the dollar reversed earlier gains to trade little changed at 1.0361 francs while the euro rose 0.3 percent to 1.5163 francs. Sterling edged up 0.2 percent to $1.5985. The Australian dollar rose 1.4 percent to US $0.8832. In the third quarter, the Aussie currency gained 9.5 percent.
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