Dollar weakens amid risk appetite, speculation on central banks

Euro rose for second straight week

Aussie Gains

The Australian dollar rose against its U.S. counterpart on prospects Reserve Bank of Australia policy makers won’t cut the highest borrowing costs among major developed nations at an Aug. 7 meeting. The Aussie appreciated 0.8 percent to $1.0569 and climbed to $1.0580 on Aug. 2, its highest since March.

Implied volatility on three-month options for Group-of- Seven currencies fell to 8.77 percent yesterday, approaching the lowest level since November 2007, according to the JPMorgan G7 Volatility Index. It reached 8.32 percent on July 20 and rose to 9.83 percent on July 24. The five-year average is 12.4 percent.

Lower volatility makes investments in currencies of nations with higher benchmark interest rates more attractive because the risk in such trades is that market moves will erase profits. Key rates are 2.5 percent in New Zealand and 3.5 percent in Australia, versus zero to 0.25 percent in the U.S. and 0.75 percent in the euro bloc.

ECB Plan

The euro, stocks and commodities slid on Aug. 2 after ECB President Draghi failed to reassure investors that policy makers were ready to take immediate steps to curb Europe’s debt crisis.

ECB officials are working on a plan to buy government bonds in sufficient quantities to ease the region’s financial turmoil, Draghi said. Details will be released in coming weeks, he told reporters at a news conference in Frankfurt after a policy meeting. The central bank held its benchmark interest rate at a record low 0.75 percent.

Draghi pledged last week to do whatever it takes to preserve the shared currency.

“People are increasingly looking past the last week of Draghi and the ECB toward more fundamentally what the ECB is going to do that’s new,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said yesterday in a telephone interview. “The fundamental that the market is latching onto now is that total political support for the European debt relief effort.”

Bloomberg News

--With assistance from Allison Bennett in New York. Editors: Greg Storey, Kenneth Pringle

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