Thursday, February 14, 2008

Dollar Heads for Biggest Weekly Loss This Year on Rate Outlook

By Stanley White and Kosuke Goto

Feb. 15 (Bloomberg) -- The dollar headed for the biggest weekly loss against the euro since December after Federal Reserve Chairman Ben S. Bernanke signaled the bank may cut interest rates further to avert a recession.

The currency traded near a one-week low versus the euro as Bernanke said the Fed ``will act in a timely manner as needed to support growth.'' The allure of U.S. assets diminished as the yield premium of European government bonds over Treasuries widened to the most in more than a week.

``The dollar will remain weak today after Bernanke's speech,'' said Motonari Ogawa, vice president of interest-rate products and foreign exchange in Tokyo at Morgan Stanley, the second-largest U.S. securities firm. ``The U.S. yield disadvantage is increasing. I was about to turn into a dollar- bull, but I'm now rethinking it.''

The U.S. currency traded at $1.4637 per euro at 10:03 a.m. in Tokyo, from $1.4643 in New York late yesterday and $1.4504 late last week. It traded at 107.88 yen from 107.87 yesterday. The yen traded at 157.89 per euro from 157.95.

The dollar may fall to $1.4720 per euro today, Ogawa forecast. It has lost 0.9 percent against the euro this week, the most since the period ended Dec. 28.

The U.S. currency declined the most this week against the Norwegian krone, falling 2.3 percent to 5.4083. It lost 1.9 percent this week against the Swedish krona to 6.3736 and 1.3 percent against the South African rand to 7.6890.

Five Rate Cuts

The Fed has reduced rates five times since September, by a total of 2.25 percentage points to 3 percent, amid the worst housing slump in a quarter century. Bernanke spoke to the Senate Banking Committee yesterday. The dollar has lost 4.5 percent against the euro since the first Fed rate cut on Sept. 18.

Futures on the Chicago Board of Trade show 36 percent odds the Fed will lower its target for overnight lending between banks by 0.75 percentage point to 2.25 percent by March 18, compared with a 30 percent chance yesterday. The remaining odds are for a half-percentage point cut.

The gap in yield between benchmark German two-year bunds and similar-maturity Treasuries widened yesterday to 1.29 percent, the most since Feb. 6. Two-year notes are among the securities most sensitive to interest-rate expectations.

The yen fell against all 16 most-traded currencies this week before Bank of Japan Governor Toshihiko Fukui and his colleagues conclude a two-day policy board meeting in Tokyo today, at which they will leave the overnight lending rate at 0.5 percent, according to all 42 economists surveyed by Bloomberg News. The rate is the lowest among major economies. Fukui will hold a press conference at 3:30 p.m. in Tokyo.

``We could see the yen fall back a little further,'' said Koji Fukaya, a senior currency strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``The BOJ is likely to keep rates on hold this year. Policy is already accommodative. The economy may slow in the first quarter, but not enough to warrant a rate cut.''

The yen may decline to 110 against the dollar by the end of March, Fukaya said.

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