Sunday, March 9, 2008

Dollar Declines on Concern U.S. Economy Entering a Recession

By Kosuke Goto

March 10 (Bloomberg) -- The dollar fell toward a record low against the euro and the lowest in eight years versus the yen on speculation U.S. retail sales and consumer confidence report will add to signs the economy is on the verge of a recession.

The U.S. currency also dropped against the British pound and the Swedish krona after a labor report on March 7 bolstered speculation the Federal Reserve will slash interest rates by 0.75 percentage point to 2.25 percent this month. The yen gained as a Japanese government report showed machinery orders rose at the fastest pace since 2000 in January, signaling demand from emerging markets may help the economy withstand a U.S. slowdown.

``The dollar will continue to head south,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``The Fed will be forced to lower rates down to 2 percent amid the slowing economy. I expect the dollar to fall below 100 yen this week.''

The dollar traded at 102.35 yen at 9:04 a.m. in Tokyo from 102.67 yen on March 7, when it slid to 101.43, the lowest since January 2000. It also weakened to $1.5390 per euro from $1.5355 late last week, when it touched $1.5459 a euro, the weakest level since the single currency's debut in 1999.

The U.S. currency declined to $2.0189 against the pound from $2.0134 on March 7, when it slumped to $2.0217, the lowest since Dec. 18. It also fell to 6.1101 versus the Swedish krona from 6.1255. It fell 0.5 percent to 1.0202 against the Swiss franc. approaching a record low of 1.0135 set on March 7.

Futures on the Chicago Board of Trade show traders see a 94 percent chance the Fed will lower its target rate 0.75 percentage point to 2.25 percent on March 18. The balance of bets is on a one percent cut.

Consumer Spending

The dollar slid before a Commerce Department report on March 13 that is forecast by economists surveyed by Bloomberg News to show consumer spending at U.S. retailers slowed in February. A separate private report the next day will probably show consumer confidence fell this month to a 16-year low.

The yen also climbed as for the first time in more than a decade foreign exchange traders are confident that the Bank of Japan won't intervene in the currency market, paving the way for the yen to extend its biggest rally since 2000.

Japanese authorities sold the currency on all four occasions since 1995 when the yen approached the 100 mark in a bid to support exporters from Toyota Motor Corp. to Sony Corp. When the yen strengthened to the eight-year high last week Finance Minister Fukushiro Nukaga stopped short of signaling that officials are concerned, only saying the government needs to watch currency moves ``carefully.''

Yen Still Weak

``When I intervened, the U.S. agreed to it,'' said Eisuke Sakakibara, dubbed ``Mr. Yen'' for his ability to influence the foreign exchange market as Japan's top currency official from 1997 to 1999. ``The U.S. now welcomes a gradual decline in the dollar and Treasury takes the position of Detroit. This is affecting how Japan is responding now.''

The yen's real effective exchange rate, measured against 15 currencies of major trading partners including China, Europe and Canada, is 99.5, according to Bank of Japan data. The rate averaged 121.9 in the first quarter of 2004, when the bank last intervened. It fell against the currencies of the Group of 10 most developed nations in the past three years except the dollar.

``The Bank of Japan can't make the argument that the yen is overly strong,'' said Collin Crownover, global head of currency management in London at Boston-based State Street Global Advisors, which oversees $100 billion in foreign exchange.

Japan's equipment orders jumped 19.6 percent from December, when they dropped 3.2 percent, the Cabinet Office said today in Tokyo. The median forecast of 36 economists surveyed by Bloomberg News was for a 2.6 percent increase.

Futures Traders

Futures traders are betting that the yen will gain against the U.S. dollar in the biggest numbers since February 2004, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 56,285 on March 4, compared with net longs of 34,289 a week earlier.

The yen was supported as higher volatility discouraged so- called carry trades. One-month implied volatility for the yen rose to 15.28 percent today, compared with 15 percent on March 7. Traders quote the gauge of expectations for future currency swings as part of pricing options.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that currency moves erase those profits.

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