Wednesday, December 5, 2007

Dollar May Extend Gain Versus Euro, Yen as Growth Concern Wanes

By Min Zeng

Dec. 6 (Bloomberg) -- The dollar may extend its gains against the euro, yen and pound as signs of resilience in the U.S. labor market and manufacturing allayed concern the U.S. economy will head into a recession.

The U.S. currency strengthened yesterday after reports showed U.S. job growth and factory orders quickened, reducing speculation of a half-percentage-point interest-rate cut by the Federal Reserve next week. The Bank of England and European Central Bank set borrowing costs today.

``It's too early to talk about recession,'' said Boris Schlossberg, senior currency strategist at in New York. ``The dollar may get a boost if European central banks follow the Fed to cut rates. It will reduce yield pressure on the dollar. We may see a turn of the global rate cycle here.''

The dollar traded at $1.4611 per euro, 110.88 yen and $2.0266 per pound at 7 a.m. in Tokyo. The U.S. currency gained 1 percent against the euro, 0.9 percent versus and yen and 1.6 percent against the pound yesterday.

The U.S. Dollar Index traded on ICE Futures in New York rose 1 percent to 76.432 yesterday and touched 76.528, the highest level since Nov. 2. The index has rallied from 74.484 on Nov. 23, the weakest since it started trading in 1973.

ECB, BOE Meetings

The U.K. central bank is forecast to hold borrowing costs at a six-year high of 5.75 percent while the European Central Bank will keep its rate at 4 percent, according to Bloomberg News surveys. ECB President Jean-Claude Trichet will have a news conference following the rate decision.

Speculation rose that the BOE may cut interest rates as soon as today after the U.K.'s biggest mortgage lender said yesterday home prices posted their longest decline since 1995. The pound fell to the lowest level in four years against the euro and the weakest since October versus the dollar.

ECB policy maker Christian Noyer said on Dec. 4 there's a ``question mark'' over hopes Europe would dodge the fallout from the U.S. housing slump. Fellow official Jose Manuel Gonzalez- Paramo said lower rates would be justified if financial-market turbulence slows growth. A report yesterday showed retail sales in the euro zone declined 0.7 percent in October, the first drop since May.

``For the first time we're seeing council members shifting their assessments of the economy and talking of interest-rate cuts,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``I'm betting on rate cuts next year.''

Sentiment Shifts

Sentiment may be shifting toward lower rates in 2008 as the U.S. housing recession threatens Europe's economy by making banks reluctant to lend to each other. The Fed cut rates twice to 4.5 percent in the past three months to shore up growth in the world's largest economy. The Bank of Canada on Dec. 4 lowered borrowing costs a quarter-percentage point to 4.25 percent.

The three-month euro interbank offered rate rose for a 16th straight day yesterday to 4.87 percent, the highest since December 2000 and 87 basis points above the ECB's benchmark, the widest gap since the euro was introduced in 1999.

``The Fed isn't alone in the sinking boat any more,'' said Samarjit Shankar, a strategist in Boston at Bank of New York Mellon, the world's largest custodial bank with over $20 trillion in assets under administration. ``If other major central banks also start to cut rates, this will help the dollar rebound.''

Dollar Declines

The dollar has declined against 15 of 16 major currencies this year, outperforming only Mexico's peso, as the Fed's rate cuts dimmed the allure of U.S. assets. The U.S. currency has lost 9.7 percent against the euro and 6.9 percent versus the yen in 2007.

Companies in the U.S. added 189,000 jobs in November, following a revised estimate of 119,000 in October, ADP Employer Services said yesterday.

The ADP number raised speculation that the government report to be released tomorrow may be stronger than the median forecast of 80,000 in a Bloomberg News survey. U.S. employers added 166,000 jobs in October, according to the Labor Department. The unemployment rate is forecast to increase to 4.8 percent from 4.7 percent.

Fed funds futures traded on the Chicago Board of Trade show a 42 percent chance policy makers will lower the target rate for overnight lending between banks to 4 percent from 4.5 percent on Dec. 11, after reaching 50 percent odds yesterday. The chance of a quarter-percentage point cut in the target rate is 58 percent.

The U.S. currency will rebound to $1.46 per euro by the end of March and $1.40 by the end of 2008, according to the median forecast of 41 economists in a Bloomberg survey.

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