NEW YORK (MarketWatch) — The dollar advanced Thursday, while the euro fell to a seven-month low and the Japanese yen attracted some buyers, amid renewed fears about fiscal problems facing a handful of European countries and as a U.S. report showed an unexpected increased in jobless claims last week.
The dollar index , which tracks the greenback against a trade-weighted basket of six major currencies, rose to 79.950 from 79.369 late Wednesday.
ECB’s Trichet Sees Major Challenges Ahead
European Central Bank President Jean-Claude Trichet told reporters Thursday the euro zone still faces major challenges but is heading in the right direction. He was speaking shortly after the ECB kept interest rates steady.
For its part, the euro tumbled on renewed fears over debt problems in the 16-nation euro zone, and as the European Central Bank kept a key benchmark rate steady.
The single currency declined 1% to $1.3736, down from $1.3906 in North American trading late Wednesday.
The British pound also fell after the Bank of England kept rates steady, down 0.3% to $1.5851.
But the dollar lost ground to trade at 88.65 Japanese yen, down from 91.01 yen late Wednesday. The yen’s a frequent beneficiary of movements out of riskier assets to a more stable one.
The euro enjoyed a short-lived respite from pressure Wednesday after the European Commission cautiously endorsed Greece’s plans to slash its budget deficit over the next three years. But the selling pressure resurfaced as the focus turned to Portugal and Spain.
‘We’re short-term bearish on the euro.’
Ray Farris, Credit Suisse
The spread between government bonds issued by Greece and Portugal widened versus comparable German bunds, highlighting worries about the fiscal outlook for nations on the so-called periphery of the euro zone. Concerns over those countries also pushed the cost of insurance for sovereign debt above the cost for U.S. companies for the first time payday advance. Read about the euro zone’s persistent credit worries.
“Over the next several months, we’ll probably have a succession of negative news associated the fiscal stress coming, first with Greece but increasingly into other sovereigns,” said Ray Farris, head of foreign-exchange strategy at Credit Suisse. “We’re short-term bearish on the euro.”
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Those concerns also weighed down U.S. stocks, with the Standard & Poor’s 500 index dropping nearly 2.5%. While less consistent in recent months, since the beginning of the credit crisis the dollar has tended to benefit when stocks fall, which traders take as a flight from risky assets to the relative safety of the U.S. currency.
That dynamic was overshadowing weak employment data in the U.S. during the session — one day before the government’s pivotal report on nonfarm payrolls for January, due out Friday.
The Labor Department said first-time claims for state unemployment benefits rose to the highest level since mid-December, up 8,000 to 480,000. The consensus forecast of Wall Street economists had been for claims to drop to 455,000. See more on U.S. jobless claims.
Also affecting trading in the British pound, Bank of England policy makers called a halt to its 200 billion pound ($319 billion) program of asset purchases but left the door open to resume purchases if it’s deemed necessary.
Currencies: Dollar up to 7-month high as risks seen in Europe