Dollar gains most against euro since 2005, yen is top performer

New York: The dollar had its biggest gain against the euro in five years as concern about Europe's debt crisis spurred demand for alternative investments while the US Federal Reserve embarked on a plan to buy US debt.

The greenback weakened against 12 of its 16 major counterparts as record-low interest rates sent investors searching for higher-yielding assets. The yen was the best performer against the greenback in 2010 even as the Japanese government took steps to weaken it. Currencies linked to commodities surged against the dollar as raw material prices hit records. US employers added 140,000 jobs in December, a report may show this week.

"The euro-dollar relationship can be described as ‘who is worse off, Europe or the US?'," said Firas Askari, head currency trader in Toronto at Bank of Montreal. "To what extent is European contagion rampant? And to what extent have we seen the bottom of the bottom of the US economy? At the end of the day, the US economy is real and strong."

The Dollar Index, which IntercontinentalExchange Inc uses to track the dollar, finished the year at 79.028, up 1.5 per cent. It rose in each of the first five months of the year as Europe's escalating debt crisis boosted demand for US assets. It declined from a high for the year in June before the Fed said it would increase asset purchases to boost growth and investors speculated the extra liquidity would debase the currency.

Bolstering economy

The dollar had a yearly gain along with global stocks, commodities and bonds, marking the first year since 2005 all posted annual increases. The Fed said on November 3 it planned to buy $600 billion (Dh2203 billion) of Treasuries through June this year to bolster the US economy and address an unemployment rate at almost a 26-year high.

The euro was the worst-performing major currency against the dollar in 2010, sliding 6.5 per cent, finishing the year at $1.3384. Economists surveyed by Bloomberg forecast the shared currency slipping to $1.31 by the end of 2011. The second-worst performer was the UK pound, which had 3.5 per cent loss.

"Currency-market investors can only focus on one thing at a time," said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co.

"We had the crisis in Greece, which had really protracted euro selling, then everyone shifted focus to the Fed with major dollar selling and in the last couple months the focus was back on Ireland and the Eurozone periphery and everyone became negative on the euro."

The Swiss franc also benefited from haven demand amid the European debt crisis, reaching records against the dollar, euro and pound. It gained 10.7 per cent against the dollar and ended the year at 93.52 centimes.

The biggest winner against the greenback in 2010 was the yen, soaring 14.7 per cent. The median estimate by 36 economists sees the yen reaching 90 in the fourth quarter of this year. It finished the year at 81.12 per dollar.

Japan's Ministry of Finance confirmed the nation's central bank purchased $25.1 billion and sold yen on September 15 to weaken the Japanese currency to curb gains that threatened an export-led recovery. The yen initially tumbled from almost a 15-year high against the dollar in the first Japanese intervention since 2004 before strengthening to 80.22 per dollar on November 1, the high for the year.

Risk-aversion flows

"One of the great ironies of 2010 was the fact that while the Japanese economy was one of the weaker performers in the G10 universe, its currency was one of the strongest," Boris Schlossberg, director of research at online currency trader GFT Forex in New York, wrote to clients. "The appreciation in the yen wasn't driven by Japanese fundamentals, but rather by risk-aversion flows in Europe and compression of yields with the US."

Countries including Brazil and Taiwan took measures last year to devalue currencies and loosen monetary policy to safeguard export-led growth. Brazilian Finance Minister, Guido Mantega raised taxes on foreign inflows twice to stem a rally in the currency.