Dollar edges higher as growth in services falls short, European debt concerns continue

By Erin Conroy, AP
Wednesday, February 3, 2010

Dollar edges higher on European debt concerns

NEW YORK — Investors dumped riskier trades for the relative safety of the dollar Wednesday after a report showed little growth in U.S. service businesses. Meanwhile markets remained skeptical about the European Union’s plans to help Greece cut its debt.

The Institute for Supply Management’s service sector index fell short of expectations, rising to 50.5 last month from a downwardly revised 49.8 in December. While any reading above 50 signals growth, the service sector’s bumpy recovery is a concern for the broader economic rebound.

In late New York trading Wednesday, the 16-nation euro fell to $1.3905 from $1.3964 late Tuesday. The euro had dropped to $1.3854 in Monday trading, its lowest point since mid-July.

The pound edged down to $1.5901 from $1.5978, while the dollar climbed to 91.04 Japanese yen from 90.38 yen late Tuesday.

The euro has been buffeted by mounting concern about the debt loads being carried by Greece, Portugal and Spain, all of which use the euro.

The European Union said Wednesday it would back Greece’s plan to shrink its massive deficits and warned it would demand tougher cutbacks. However investors worried that striking Greek workers could hinder implementation of the plan.

A Greek default would be a serious blow to the EU’s monetary union, which requires members to keep their finances under control. The crisis has also sparked speculation that Greece may need a bailout from other EU nations to pay its bills if it can’t make the cuts it is promising or raise the money it needs.

Spreads on government bonds for other eurozone nations with soaring deficits also rose, highlighting worries that Spain and Portugal could also have trouble getting their debt under control. Portuguese spreads hit a 10-year high.

EU Economy Commissioner Joaquin Almunia said Greece, Spain and Portugal had all seen a “permanent loss of competitiveness” since joining the euro, pointing to labor costs that are much higher than other euro nations.

“As several European finance ministers have suggested, ‘bailing out’ Greece would unveil a huge moral hazard and investors would balk,” Brown Brothers Harriman analyst Marc Chandler wrote in a client note.

“As Portugal’s debt market performance illustrates, if Greece is supported, investors may ’strike’ until Portugal is treated in a similar fashion,” Chandler wrote. “And then who is next — Spain?”

Investors also looked ahead to the European Central Bank’s policy statement Thursday in which it is expected to leave interest rates unchanged at 1 percent.

Low interest rates can weigh down a currency as investors move funds to others that have higher yields. The U.S. has one of the lowest official interest rates of the major economies, and many emerging-market countries have substantially higher rates. The ECB’s rate is also higher than the U.S. federal funds rate of near zero.

In other late trading Wednesday, the dollar advanced to 1.0616 Canadian dollars from 1.0596 Canadian dollars late Tuesday, and rose to 1.0585 Swiss francs from 1.0551 francs.

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