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Aug. 19 (Bloomberg) -- The dollar was poised for its biggest weekly advance against the euro in more than two months on reports that said international investors are buying more U.S. debt.
The U.S. currency is set to end a six-week slide against the euro and a two-week drop versus the yen after the government said foreign investors increased their purchases of U.S. assets such as bonds and stocks. The Federal Reserve said yesterday its holdings of Treasury and agency debt for foreign central banks and international accounts rose to $1.468 trillion in the past week.
``I am positive about the U.S. dollar,'' said Hiroyuki Yamada, who helps oversee the equivalent of about $1.29 billion in fixed income securities at Daiwa SB Investments Ltd. in Tokyo, a unit of Japan's second-largest brokerage. ``The spread of yield is wider.'' Yamada said he bought U.S. Treasuries earlier this month.
The U.S. currency this week advanced 2.2 percent to $1.2164 per euro and rose 1.1 percent to 110.56 yen as of 3:23 p.m. in Tokyo, according to currency-dealing system EBS. It was the dollar's biggest weekly gain against the euro since the period ended June. 3. The dollar traded at $1.2175 per euro and 110.54 yen late yesterday in New York.
The New York branch of the Fed said it held a daily average of $1.099 trillion of Treasuries, an increase of $7.207 billion from the previous week. Holdings as of Aug. 17 totaled $1.470 trillion, consisting of $1.101 trillion in Treasuries and $369.130 billion in agency debt, according to the Fed's report.
International investors added a record amount of corporate bonds in June, the U.S. Treasury reported on Aug. 15. Foreigners bought a net $71.2 billion of U.S. financial assets in June.
`Demand for Dollars'
U.S. 10-year Treasuries yield 1.03 percentage points more than similar maturity German bunds, above the 60 basis point average over the past 12 months.
The Fed on Aug. 9 raised its benchmark rate to 3.5 percent and repeated a pledge to keep lifting rates at a ``measured'' pace. The European Central Bank has left its benchmark at 2 percent since June 2003, and the Bank of Japan has kept borrowing costs near zero for more than four years.
``There's demand for dollars because U.S. yields are definitely higher than those in Europe,'' said Satoshi Asai, who helps oversee $1 billion of bonds at Sompo Japan Asset Management in Tokyo, a unit of Sompo Japan Insurance Inc., the nation's third- largest casualty insurer. Asai said he may buy the dollar should it weaken significantly.
The Philadelphia Fed's general economic index for August increased to 17.5 from 9.6 in July. Economists expected a reading of 14, based on the median of 48 forecasts in a Bloomberg survey. The New York Fed's Empire index, another regional manufacturing index, four days ago beat the median forecast of economists.
The Labor Department on Aug. 17 said U.S. wholesale prices rose in July by the most in nine months, up 1 percent. Consumer prices gained 0.5 percent in July, the most in three months, a separate report showed on Aug. 16.
Yen Bulls
Japan's currency may gain on the day after a government report yesterday said foreign investors bought the largest amount of Japanese stock in 17 months.
Foreign investors purchased a net 721.9 billion yen ($6.5 billion) in Japanese equities, according to a report released by the Ministry of Finance in Tokyo. The amount was the largest since the week ended March 19, 2004, when foreigners purchased 1.15 trillion yen worth of equities.
``I am bullish on the yen,'' said Xinyi Lu, chief strategist of the international treasury and trading department in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-biggest lender. ``Foreigners will keep buying the Japanese stocks and the data show Japan's economy is in a good shape.'' The yen may rise to 108 per dollar in a month, he said.
Japan's gross domestic product will probably expand 2 percent in the year ending March 31, 2006, accelerating from 1.9 percent last fiscal year, according to the median forecast of 14 economists compiled by Bloomberg News on Aug 16. That's up from a 1.5 percent prediction in a July survey.
`Housing Bubble'
Akihiro Tanaka, a senior currency dealer in Tokyo at Resona Bank Ltd., said rate increases by the Fed will underpin demand for the dollar rather than cause a surge in the currency.
Higher interest rates in the U.S. ``will support the dollar's upward momentum, although it's not going to be a straight line up,'' he said. ``The Fed might want to increase interests much faster and higher than people have expected, especially in order to tackle the possible housing bubble.''
U.S. builders broke ground on 2.042 million housing units at an annual rate in July compared with a revised 2.045 million a month earlier that was higher than previously reported, the Commerce Department said Aug. 16.
June Eurodollar futures yield around 4.405 percent, up from 4.250 percent a month ago. The futures settle at a three-month lending rate that has averaged about 21 basis points more than the Fed's target over the past 10 years.
A higher interest rate ``translates into the stronger U.S. dollar story,'' said Craig Ferguson, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. Currency ``markets do move on a basis of yields.''
The U.S. currency may rise to $1.17 against the euro and 115 yen by year-end, he said.
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