Friday, March 21, 2008

Dollar Gains Versus Euro, Yen as Fed Acts to Restore Confidence

By Stanley White and Ye Xie

March 21 (Bloomberg) -- The U.S. dollar posted its first weekly advances against the euro and the yen in a month on speculation Federal Reserve moves to revive lending among banks will restore confidence in financial markets and the economy.

The greenback also strengthened to at least one-month highs versus currencies of commodity producing nations from Norway to Australia after raw materials including gold and oil tumbled the most in five decades. The Fed cut interest rates, agreed to accept a wider range on collateral on loans and extended credit to securities firms for the first time.

``The dollar is enjoying a bounce,'' said Hideki Amikura, deputy general manager of currencies at Nomura Trust and Banking Co. in Tokyo, a unit of Japan's largest brokerage. ``The Fed is working to restore confidence. U.S. investment bank earnings weren't as dire as some predicted.''

The dollar rose to $1.5431 per euro from $1.5674 on March 14, for a 1.6 percent gain, the first weekly advance in more than a month. The dollar bought 99.58 yen, or 0.5 percent more than March 14, the first weekly gain since Feb. 15. The yen rose 1.1 percent this week to 153.55 per euro, touching the strongest since August.

The pound fell 1.9 percent this week to $1.9818. The dollar gained 1.1 percent to 1.0093 Swiss francs.

Trading volume may have been less than half of normal due to public holidays in the U.S., the U.K. and other financial markets, said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co.

Commodities Tumble

The U.S. Dollar Index traded on ICE Futures in New York rose 1.5 percent this week to 72.71. The gauge touched a record low of 70.698 on March 17, the same day the dollar fell to an all-time low against the euro.

The dollar's rally accelerated after the Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956.

The dollar bought 5.2616 Norwegian kroner, from 5.2630 yesterday, when it touched the highest since Feb. 26. The U.S. currency rose 3 percent against the krone this week.

Australia's dollar dropped to 90.21 U.S. cents, close to a five-week low, and finished down 3.8 percent this week.

Gold had its biggest weekly loss since August 1990 and oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever.

Fed Measures

Fed officials announced on March 11 a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. Yesterday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans.

The U.S. currency has slumped this year as banks around the world have posted $195 billion in writedowns and credit losses, according to Bloomberg data, due to rising delinquencies on mortgages to U.S. homeowners with poor credit.

The Fed said yesterday it had lent $28.8 billion securities firms under the program announced on March 16, its first extension of credit to non-banks since the 1930s.

The Fed also put taxpayer money at risk by making available up to $30 billion to JPMorgan Chase & Co. for the purchase of Bear Stearns Cos.

The tumble in commodities and the dollar's rebound gained momentum after the Fed reduced interest rates by 0.75 percentage point to 2.25 percent on March 18. The move was less than the full-point cut traders expected, sapping demand for oil and gold as a hedge against inflation.

`Dollar Will Rebound'

``Commodities -- one of the few remaining long trades -- have turned south,'' BNP Paribas SA strategists led by Hans- Guenter Redeker wrote in a research note yesterday. ``The currency market is next in line, forcing investors out of yielding positions. We underline our bearish commodity currency call. The dollar will rebound.''

The dollar may rise to 5.47 kroner and 85 cents per Australian dollar at the end of this year, BNP Paribas forecast.

The euro headed for a weekly loss on speculation growth in the 15 countries that share the currency will slow and subprime loan losses will spread at European investment banks.

Credit Suisse Group, Switzerland's second-largest bank, said it will write down $2.65 billion after a ``small number'' of its traders deliberately mispriced residential mortgage- backed bonds. Credit Suisse also said it's unlikely to make a profit this quarter.

The French statistics office today cut its growth forecast and raised its inflation forecast. Growth in France, Europe's second-largest economy, will slow to 0.3 percent in the second quarter from 0.4 percent in the previous quarter.

``The euro has some room to adjust lower,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``We're getting confirmation that subprime is shifting to the European financial sector. The euro-zone economy will start to slow from here on.''

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