Wednesday, September 26, 2007

Dollar Trades Near Record Low Versus Euro Before New-Homes Data

By Kosuke Goto and Min Zeng

Sept. 27 (Bloomberg) -- The dollar traded within a cent of its all-time low against the euro before a U.S. report forecast by economists to show new-home sales fell last month.

Traders increased bets that the Federal Reserve will cut borrowing costs for a second time this year to prevent the biggest housing slump in 16 years from weakening the economy. Policy makers on Sept. 18 reduced the target rate for overnight lending between banks a half-percentage point, making dollar- denominated assets less attractive to foreign investors.

``The slowing housing market is an albatross around the U.S. economy's neck,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo. ``The dollar remains weak amid concern over the slowdown in the U.S.''

The dollar traded at $1.4129 per euro at 9:00 a.m. in Tokyo from $1.4128 in New York yesterday, when it fell to $1.4162, the lowest since the European currency's debut in January 1999. It was the fifth straight trading day the dollar fell to a record. The U.S. currency traded at 115.45 yen from 115.55.

The dollar may decline to a record low of $1.42 per euro today, according to Saito.

The U.S. dollar has weakened against 13 of the 16 most- actively traded currencies this quarter, depreciating 4.1 percent against the euro and 7 percent versus the yen. The Commerce Department will report today that new-home sales decreased 5.2 percent last month to the lowest in seven years, according to a Bloomberg News survey of economists.

Future Contracts

Futures contracts yesterday suggested about 86 percent odds of a quarter-percentage point cut in the 4.75 percent target rate at the Fed's next meeting Oct. 31, compared with a 72 percent chance a week ago. The European Central Bank's target lending rate is 4 percent, and the Bank of Japan's is 0.5 percent, the lowest among industrialized countries.

The dollar was weaker against the yen before Bank of Japan policy board member Miyako Suda speaks at a financial conference in Tsu, Mie Prefecture in western Japan today.

Suda and fellow policy makers Atsushi Mizuno and Tadao Noda unsuccessfully proposed doubling the key rate to 0.5 percent in January, a month before the board proceeded with a rate increase.

``Suda may speak in a hawkish manner,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``If Suda hints at possibility of a rate hike in October, it is likely to be positive for the yen,'' which may rise to 109 per dollar by year-end, Umemoto said.

Investors see a 9 percent chance of a rate increase at a BOJ meeting on October 10-11, unchanged from yesterday, according to Credit Suisse Group calculations using overnight index swap rates.

Quarterly Loss

The Japanese currency touched a seven-week low against the euro yesterday as investors resumed carry trades in which they take loans in a country with low borrowing costs and invest where interest rates are higher.

Japan's currency traded at 163.14 per euro after a 0.6 percent decrease yesterday, when it touched 163.44, the weakest since Aug. 9.

The yen rallied on Aug. 17 to the highest against the dollar since June 2006 as higher borrowing costs related to subprime mortgage losses led investors to avoid higher-yielding assets. The yen is up this quarter against all of the 16 most- actively traded currencies except Norway's krone.

One-month dollar-yen implied volatility fell to 9.5 percent, the lowest since Aug. 8. Lower volatility tends to encourage carry trades because it implies smaller swings in exchange rates.

The Chicago Board Options Exchange Volatility Index touched 17.68 yesterday, the lowest since July. Lower readings in the so-called VIX, derived from prices paid for Standard & Poor's 500 options, indicate traders expect smaller share-price swings in the next 30 days.

Last Updated: September 26, 2007 20:12 EDT

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