Dollar may extend two-year decline against Euro on slower growth
(Before You Delete This, I Believe A Falling $ Effects Everybody Including ERHE's R.M.)
THE dollar may extend a two-year decline against the Euro on speculation that a slowing economy will make U.S. assets less attractive to investors.
The U.S. currency fell versus 14 of the 16 most-actively traded currencies in 2007 as the Federal Reserve reduced borrowing costs three times to temper the worst housing slump since 1991. The unemployment rate probably increased last month to the highest since July 2006, according to the median forecast in a Bloomberg News survey before the government reports the data on January 4.
"The U.S. economy will be pushed close to the recession level," said Greg Salvaggio, vice president of capital markets in Washington at currency-trading company, Tempus Consulting. "There will be further dollar weakness in early 2008."
The dollar lost 9.5 per cent against the Euro in 2007, dropping to $1.4588, following a 10.2 per cent drop in 2006. It increased 0.9 per cent yesterday after a report from the National Association of Realtors showed purchases of existing homes unexpectedly rose in November.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the dollar versus the Euro, compared with those on a gain - so-called net shorts - fell to 30,641 in the week to December 25, from 31,149 the previous week and a record of 120,000 in May, figures from the Washington-based Commodity Futures Trading Commission show.
"One of the larger positions in the market" in 2007 was bets the Euro would rise versus the dollar, "and that's being reduced," said Robert Fullem, manager of corporate foreign exchange sales in New York at Bank of Tokyo-Mitsubishi UFJ Ltd.
U.S. payrolls rose by 70,000 last month after increasing 94,000 in November, according to the median forecast of economists surveyed by Bloomberg before the Labor Department's report. The jobless rate probably increased to 4.8 per cent from 4.7 per cent in November.
The U.S. currency fell 6.3 per cent for the year to 111.55 yen, dropping 0.7 per cent yesterday. The Euro increased 3.5 per cent to 162.78 yen for its eighth straight yearly increase.
Since October 31, the yen has appreciated against all of the 16 most active currencies as exchange-rate volatility discouraged carry trades funded in Japan.
In the carry trade, investors borrow in countries with lower lending rates and use the cash to buy assets in nations that offer higher returns. Currency fluctuations can erase the profits.
Implied volatility on the three-month dollar-yen option, a gauge of the risk associated with currency bets, reached 10.58 per cent yesterday, the highest since December 5.
Japan's benchmark interest rate of 0.5 per cent, the lowest in the industrialised world, compares with 11.25 per cent in Brazil, 8.25 per cent in New Zealand and 4 per cent in the 13 nations sharing the Euro.
The dollar fell 17 per cent versus the Brazil real in 2007 on speculation that growth in U.S. gross domestic product will slow.
The economy will increase at a 1 per cent yearly rate in the fourth quarter, down from 4.9 per cent in the third quarter, according to the median forecast of 63 economists surveyed by Bloomberg News.
The Fed cut its benchmark lending rate by a total of 1 percentage point to 4.25 per cent in three steps in 2007 beginning in September. The European Central Bank increased its rate two times last year to 4 per cent.
The chance the Fed will cut the target rate for overnight lending between banks a quarter-percentage point at its meeting has risen to 92 per cent from 76 per cent a week ago, according to futures on the Chicago Board of Trade.
The U.S. currency will trade at $1.45 against the Euro and 110 against the yen by the end of March, according to the median forecasts of 42 analysts and brokerages surveyed by Bloomberg.
