Thursday, February 28, 2008

Dollar Trades Near Record Low Versus Euro Before Spending Data

By Kosuke Goto

Feb. 29 (Bloomberg) -- The dollar traded near a record low against the euro before a U.S. report forecast to show consumer spending stayed at the weakest in six months in January.

The U.S. currency headed for the biggest monthly loss against the euro since September as a cooling economy fueled bets the Federal Reserve will cut interest rates at least twice more this year. The dollar also approached a 2 1/2-year low versus the yen after Fed Chairman Ben S. Bernanke said the dollar's depreciation is ``a positive factor'' for reducing the U.S. trade deficit.

``This is the Bernanke shock, causing much faster dollar depreciation than expected,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``We are entering into another world of dollar weakness. The Fed is not unhappy about that.''

The U.S. currency traded at $1.5188 per euro as of 8:26 a.m. in Tokyo, from $1.5193 in New York late yesterday when it touched $1.5229, the weakest since the euro began trading at about $1.17 in January 1999. The U.S. currency was at 105.33 yen and approached the 2 1/2-year low of 104.97 yen touched on Jan. 23. It was at 105.37 yen late yesterday in New York.

The dollar may fall to $1.5230 per euro and 105 yen today, Kato forecast.

`Some Improvement'

``Part of the effect of that depreciation has been that we are at least seeing some improvement in that trade deficit, which is a positive -- a positive factor,'' Bernanke said before a Senate panel yesterday.

The Australian dollar and the Brazilian real are the best performers among all 16 major currencies this month as a rebound in stocks prompted investors to resume so-called carry trades.

U.S. personal spending rose 0.2 percent last month, matching a gain in December that was the smallest since June, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department report today.

The dollar extended its slump yesterday as the government said initial jobless claims rose 19,000 to 373,000 in the week to Feb. 23. The U.S. grew at an annual rate of 0.6 percent last quarter, from 4.9 percent the prior three months, the government also said. The median forecast in a Bloomberg survey was for growth of 0.8 percent.

The U.S. currency has dropped 13 percent versus the euro in the past year as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since September. The U.S. Dollar Index, which tracks the currency against six major counterparts, yesterday touched 73.63, the lowest since its start in 1973. The index is traded on ICE Futures in New York.

Yen Gains

The yen yesterday advanced 2.8 percent to 13.92 per rand and gained 1.2 percent versus the New Zealand dollar as investors reduced carry trades, where they get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between them.

Japan's benchmark rate of 0.5 percent, the industrialized world's lowest, compares with 11 percent in South Africa, 8.25 percent in New Zealand and 7 percent in Australia.

President George W. Bush said yesterday his administration supports a ``strong dollar,'' and the currency's value will be reflected by markets as the economy grows. He spoke at a news conference at the White House.

Euro's Gain

The euro is 30 percent above its debut level, and up 84 percent from a record low of 82.30 U.S. cents in October 2000.

After trading in a range since November of about $1.43 to $1.49 per euro, the dollar's decline gained momentum this week after Fed Vice Chairman Donald Kohn said on Feb. 26 that turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.

The dollar weakened past $1.51 per euro on Feb. 27 after Bernanke said the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in a testimony to the House Financial Services Committee.

``He said the Fed is in a more difficult situation than 2001,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He sent a signal that the Fed may be pushing on a string, and they will have to cut rates more aggressively.''

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

European Central Bank President Jean-Claude Trichet yesterday said ``price stability is a necessary condition'' for ongoing economic expansion and employment. The ECB next meets on March 6 to decide on the main rate, which is at 4 percent.

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