Wednesday, February 27, 2008

Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation

By Ye Xie and Kim-Mai Cutler

Feb. 28 (Bloomberg) -- The dollar traded at a record low below $1.51 per euro after Federal Reserve Chairman Ben S. Bernanke signaled he's ready to lower interest rates again to support the weakening U.S. economy.

An index that tracks the currency against six major counterparts dropped yesterday to the lowest since its inception in 1973, as European Central Bank policy maker Axel Weber said investors expecting rate cuts in the region are underestimating inflation. The U.S. currency fell to an all-time low against the Swiss franc and to a 23-year low versus the Australian dollar.

``This is a new chapter for the dollar,'' said Russell LaScala, head of foreign-exchange trading in North America at Deutsche Bank AG in New York. ``You are seeing divergence of central banks' views.''

The dollar traded at $1.5118 per euro at 7:07 a.m. in Tokyo, after touching $1.5144 yesterday, the weakest since euro's debut in 1999. The dollar traded at 106.47 yen, after falling 0.8 percent yesterday and coming within 1 percent of a 2 1/2-year low reached in January. The euro traded at 160.99 yen.

LaScala said dollar-selling gained momentum on Feb. 26 after Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The currency has slid 4 percent against the euro in the past three weeks as the housing recession worsened and consumer confidence sank, leading traders to exit bets on a dollar rebound. The dollar will rise to $1.45 per euro by mid-year, according to the median forecast in a Bloomberg survey.

Bernanke Speaks

The dollar weakened past $1.51 per euro yesterday after Bernanke said the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in testimony to the House Financial Services Committee in Washington. The Fed watches the dollar ``very carefully,'' and has no ``target'' for it, he also said.

Futures on the Chicago Board of Trade show most traders expect the Fed to cut rates to at least 2 percent by mid-year, from 3 percent now. The bank has slashed rates from 5.25 percent in September, and is scheduled to meet next on March 18.

``The dollar is undermined by lower U.S. yields,'' said Daniel Katzive, a senior currency strategist at Credit Suisse Group in New York. ``I don't think there's much scope for that to change; the dollar will remain weak.''

Deutsche Bank, the world's biggest foreign-exchange trader, predicts the euro, which is shared by 15 European countries, will rise to $1.55 by March 31.

Synthetic Euro

The Australian dollar yesterday climbed to 94.30 U.S. cents, the strongest since 1984. Australia's main rate is 4 percentage points above the Fed's target.

A Fed trade-weighted index of the dollar against major currencies has fallen 11.3 percent in the past year. The U.S. Dollar Index traded on ICE Futures in York, which tracks the currency against six major counterparts, dropped to 74.07 yesterday, the lowest since its inception in 1973. The euro is 29 percent above its debut level of about $1.17, and 83 percent higher than its record low of 82.30 U.S. cents in October 2000.

The so-called synthetic euro, which estimates the European currency's value before 1999, reached the strongest since at least January 1989, when Bloomberg's data on the measure begin.

The U.S. currency has dropped 12 percent versus the euro in the past year. It has weakened against 15 of the 16 most- active currencies as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since Sept. 18.

Contrast With ECB

By contrast, the ECB has held its main rate at a six-year high of 4 percent since June to counter inflation pressures from surging food and oil prices. Traders increased wagers on rate cuts after ECB President Jean-Claude Trichet on Feb. 7 dropped a threat to raise borrowing costs and said uncertainty about economic growth is ``unusually high.''

``The consensus expectation for interest rates on the market at the moment clearly underestimates, in my opinion, the inflation risks,'' Weber said yesterday, according to the text of a speech in Bonn. ``In 2009, inflation will not slow as markedly as supposed in the December projections, which were based on lower oil prices.''

The euro at $1.45 isn't the ``hurdle'' the ECB thought it was, council member Nout Wellink said yesterday in an interview in New York. Europe's economy is in ``rather good shape,'' he said.

`Vicious Cycle'

The slump in the dollar helped push oil prices to a record above $102 and increased the cost of buying precious metals.

``We're talking about a vicious cycle if you look at price increases in commodities,'' said Stephen Jen, Morgan Stanley's global currency economist in London. ``The dollar weakens first, then food and oil prices rise, which complicates policy-making. At this point, the dollar is hurting itself.''

The dollar will continue to trade below $1.50 for the next few weeks, Robert Sinche, head of global currency strategy at Bank of America N.A. in New York, wrote in a research note dated yesterday.

U.S. new home sales dropped 2.8 percent to an annual pace of 588,000 last month, the lowest pace since 1995, the Commerce Department said yesterday.

The dollar's decline was ``slightly quicker than we thought,'' said Derek Halpenny, a senior currency strategist with Bank of Tokyo-Mitsubishi in London. ``A lot of hedge fund players have missed this move.''

These speculators' bets on euro gains against the dollar are close to a two-year low, the latest figures from the Washington-based Commodity Futures Trading Commission show.

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