Tuesday, February 26, 2008

Dollar Falls to Record Low of $1.50 per Euro on Rate Outlook

By Kosuke Goto and Stanley White

Feb. 27 (Bloomberg) -- The dollar fell to a record low of $1.50 per euro on speculation Federal Reserve Chairman Ben S. Bernanke today will indicate the U.S. central bank is prepared to keep lowering interest rates.

The currency is headed for its second straight monthly decline on expectations a U.S. government report today will show a drop in new home sales, bolstering the Fed's case for cutting its 3 percent target for the overnight lending rate between banks. The euro climbed to a six-week high against the yen as traders bet the European Central Bank will keep its 4 percent benchmark rate unchanged in coming months.

``We're going into a new leg of dollar weakness,'' Tony Morriss, a currency strategist in Sydney at Australia & New Zealand Banking Group Ltd., Australia's third-biggest bank, said in an interview with Bloomberg Television. ``The Federal Reserve is sending a pretty clear signal they need to support growth.''

The U.S. currency touched $1.5047 per euro, the lowest since the European single currency was introduced in 1999, before trading at $1.4991 as of 10:46 a.m. in Tokyo from $1.4974 in late New York yesterday. It was little changed at 107.22 yen. The euro rose to 160.73 yen from 160.67. The dollar may fall to $1.53 per euro in the next three months, Morriss said.

The U.S. dollar slid against 11 of the 16 most-active currencies before Bernanke delivers his semi-annual testimony to the House Financial Services Committee at 10 a.m. in Washington today. Fed Vice Chairman Donald Kohn said yesterday turmoil in credit markets and the possibility of slower economic growth pose a ``greater threat'' than inflation.

Commodities Fallout

The slump in the dollar pushed oil prices to a record yesterday and increased the cost of buying wheat, sugar, copper, cotton and cocoa. Asian currencies rallied, with China's yuan posting the biggest gain in a week. Chinese Premier Wen Jiabao yesterday told visiting U.S. Secretary of State Condoleezza Rice a stable dollar is good for the U.S. and the rest of the world, Xinhua news agency reported.

The greenback has lost about a quarter of its value in the past five years, according to the Fed's U.S. Trade Weighted Major Currency Dollar index, which comprises seven currencies of U.S. trading partners. The index declined 0.6 percent to 72.06 yesterday, approaching a three-month low set on Nov. 26. The weaker dollar has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation's trade deficit last year for the first time since 2001.

All of the 10 most actively-traded currencies in Asia outside Japan gained against the dollar today, led by the Taiwan dollar with a 0.5 percent rally to NT$31.071. Indonesia's rupiah rose 0.4 percent to 9,068 and the Singapore dollar climbed 0.3 percent to S$1.4018. The yuan advanced 0.1 percent to 7.1484.

`Crunch Time'

``It's crunch time for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value. ``Bernanke may know that monetary policy alone cannot support the slowing U.S. economy.''

The U.S. currency may fall to $1.51 per euro and 106.80 yen today, Saito forecast.

The dollar will rebound to $1.48 per euro by the end of March, according to the median forecast in a Bloomberg News survey of 41 analysts. Merrill Lynch & Co., the third-biggest U.S. securities firm, is the most bearish, predicting it will fall to $1.57 per euro by March-end.

New home sales dropped 0.7 percent to an annual pace of 600,000 last month, according to the Bloomberg survey median estimate before today's Commerce Department report.

`Shifting Away'

The dollar may fall at least another 10 percent on a trade- weighted basis, said Kenneth Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts, and formerly chief economist at the International Monetary Fund.

``We're seeing demand shifting away from the U.S. to Europe and Asia,'' he said.

The U.S. will expand 1.5 percent this year, compared with a 4.1 percent rate for the global economy, the Washington-based IMF said in January.

Futures on the Chicago Board of Trade show traders see a 96 percent chance the U.S. central bank will reduce the 3 percent target rate for overnight lending between banks by 50 basis points at their March 18 meeting, and a 4 percent likelihood of a quarter-point cut. The Fed has already cut rates five times since Sept. 18.

ECB on Hold

The euro gained as the Munich-based Ifo institute yesterday said its business climate index rose to 104.1 in February, from 103.4 in January. The median estimate in a Bloomberg survey was for a drop to 102.9. After the report, traders pared bets the ECB will lower its target from the current 4 percent level.

``Germany's business sentiment was unexpectedly strong,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``The ECB is likely to keep borrowing costs unchanged instead of cutting rates as some had expected.''

The euro may rise to 161.40 yen today, Muramatsu forecast.

The odds of the ECB lowering borrowing costs fell yesterday, with the implied yield on the Euribor futures contract for June rising 4 basis points to 4.15 percent. The yield averaged 0.18 percentage point more than the ECB's benchmark from 1999 until August. A basis point is 0.01 percentage point.

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