Dollar weakens on stimulus speculation; Australian dollar gains

July 19 (Bloomberg) -- The dollar fell against all of its 16 most-traded peers as speculation the Federal Reserve and the Chinese government will take further steps to encourage economic growth damped demand for safer assets.

The Australian and New Zealand dollars led gains in higher-yielding currencies as European and Asian stocks advanced. The euro dropped for a second day versus the yen as borrowing costs increased at a Spanish debt sale. China’s Premier Wen Jiabao may decide to cut banks’ reserve requirements when the cabinet meets to discuss ways to spur growth. Fed Chairman Ben S. Bernanke yesterday kept open the possibility of additional stimulus.

“In Asian trading today there was talk about an imminent reserve requirement cut” in China, said Derek Halpenny, European head of global markets research at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “The two days of testimony from Bernanke has held out the hope of further steps from the Fed. That hope is definitely still in the market.”

The U.S. currency fell 0.3 percent to 78.55 yen at 8:44 a.m. New York time and touched 78.43 yen, the lowest since June 5. The greenback slipped 0.1 percent to $1.2296 per euro after reaching $1.2324, the weakest level since July 10. The euro declined 0.2 percent to 96.59 yen.

The dollar remained lower versus the yen and euro after Labor Department data showed more Americans than forecast filed first-time claims for unemployment-insurance payments last week. Applications for jobless benefits climbed by 34,000 to 386,000 in the week ended July 14, the figures showed. Economists in a Bloomberg survey forecast 365,000 claims. The volatility in the numbers was due to a change in the timing of annual automobile- plant layoffs, a Labor Department spokesman said.

‘Further Action’

Bernanke said in testimony to the House Financial Services Committee yesterday in Washington that the central bank is “prepared to take further action as appropriate to promote a stronger economic recovery”

The Australian dollar rose for a fifth day, gaining 0.7 percent to $1.0438. The New Zealand currency gained 0.6 percent to 80.49 U.S. cents.

The Stoxx Europe 600 Index climbed 1 percent, and the MSCI Asia Pacific Index of shares added 1.7 percent. Futures on the Standard & Poor’s 500 Index rose 0.4 percent.

The implied volatility of three-month options on Group of Seven currencies fell to 8.64 percent, according to a JPMorgan Chase & Co. measure, the lowest since November 2007. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits.

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