BL: Dollar Falls Below 108 Yen as Debt Losses May Spur Fed Rate Cut
By Ron Harui and David McIntyre
Nov. 23 (Bloomberg) -- The dollar dropped below 108 yen for the first time since 2005 and fell to a record low against the euro on speculation deepening U.S. credit-market losses will prompt the Federal Reserve to cut interest rates.
The currency headed for its biggest weekly decline versus the euro in a year as traders raised bets the Fed will lower borrowing costs for the third time. It also was poised for a weekly loss versus the yen as concern that turmoil in credit markets will slow global economic growth spurred investors to sell higher-yielding assets bought with money borrowed in Japan.
``Dollar weakness is going to continue,'' said Stephen Halmarick, co-head of economic and market analysis in Sydney at Citigroup Australia, a unit of the largest U.S. bank by assets. ``The U.S. economy is going to underperform and the Fed is going to be easing.''
The dollar dropped to $1.4967 per euro, the weakest since the single European currency's debut in 1999, before trading at $1.4940 at 12:10 p.m. in Singapore from $1.4849 in New York yesterday. It will fall to $1.57 per euro by the end of the first quarter as the Fed reduces its benchmark rate by 1 percentage point in that time, Halmarick said.
The yen rose to 107.69 per dollar, the highest since June 10, 2005. It also was at 160.92 versus the euro from 161.07 yesterday and 162.86 on Nov. 16. Trading volumes may be below average because of Japan's Labor Thanksgiving day public holiday.
Pace of Decline
The U.S. currency has declined 11.7 percent this year against the euro as the Fed's two rate cuts since September to 4.5 percent reduced the allure of U.S. assets. The odds of the Fed cutting rates to 4.25 percent on Dec. 11 were 90 percent, up from 66 percent a month ago, futures contracts traded on the Chicago Board of Trade showed.
The pace of the dollar's drop has surprised economists. The median forecast of 41 analysts and strategists was for the currency to trade at $1.45 to the euro by year-end, according to a Bloomberg News survey.
Nations such as the United Arab Emirates with fixed exchange rates to the dollar are considering revaluation to curb inflation. Japan, the world's second-largest shipbuilding nation, plans to use the yen for new contracts to stop a weaker dollar eroding earnings, Masamoto Tazaki, chairman of the Shipbuilders' Association of Japan, told a news conference in Tokyo yesterday.
A Japanese government report this week showed exports rose to a record in October as companies shipped more cars and electronics to Asia and Europe, allaying concern that a U.S. slowdown will cool Japan's economic expansion.
Carry Trades
The yen advanced this week against all of the world's 16 most-actively traded currencies as an index of Asian stocks headed for a third weekly loss, spurring a reduction in so-called carry trades. The MSCI Asia-Pacific Index of regional shares excluding Japan was set for a 5 percent decline this week, the most in three months.
``As risk appetite deteriorates the yen will be supported,'' said John Kyriakopoulos, a Sydney-based currency strategist at National Australia Bank Ltd., the nation's largest lender. ``As fears of a U.S. recession grow, so will the fears of a sharp global slowdown.''
The next target for the yen is 106.55 against the dollar, Kyriakopoulos said.
Japan's currency gained the most this week against Brazil's real, a favorite of the carry trade, rising 5 percent to 60.6324. It rose 5 percent versus Australia's dollar to 94.33 and advanced 4.9 percent against South Korea's won to 8.6643.
China's Yuan
In carry trades, investors sell currencies in countries with low borrowing costs and buy higher-yielding assets elsewhere, profiting from the difference. The risk is exchange-rate fluctuations erase those profits.
Gains in the yen quickened after China's yuan rose beyond 7.4 to the dollar for the first time since a link to the U.S. currency was scrapped in 2005 before a European delegation arrives in Beijing next week to press for faster appreciation.
European Central Bank President Jean-Claude Trichet, Luxembourg Prime Minister Jean-Claude Juncker and European Union Commissioner Joaquin Almunia arrive in Beijing on Nov. 27 for two days of talks with central bank officials.
The euro's 3.1 percent rally this month against the dollar may stall as ECB officials may today show concern the currency's rise is excessive. Airbus SAS's Chief Executive Officer Tom Enders was reported by the Der Spiegel magazine as saying the company may have ``massive losses'' due to the dollar's fall versus the euro.
``It means that for some of the big European corporates such as Airbus that there's a pain threshold,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``Maybe they'll need to signal that anything above $1.50 they will take some steps. Perhaps it will be sufficient to slow the advance of the euro.''
`Brutal Moves'
The euro may move between $1.4750 and $1.5000 next week, Morriss said. Trichet and ECB council member Axel Weber speak at the European Banking Congress in Frankfurt.
Trichet said yesterday in Paris that he opposes ``brutal moves'' in currencies, stepping up his efforts to stem the euro's advance to record highs. U.S. Treasury Secretary Henry Paulson last week reiterated he favors a ``strong dollar'' that over the long-term will reflect the strength of the economy.
The euro has gained 13.2 percent against the dollar this year, eroding the competitiveness of European exports. The European Commission this month cut its forecast for euro-area economic growth next year to 2.2 percent from 2.5 percent.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net ;
Last Updated: November 22, 2007 23:17 EST
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