Thursday, March 27, 2008

Dollar Heads for Biggest Weekly Drop Against Euro in Two Years

By Kosuke Goto

March 28 (Bloomberg) -- The dollar fell against the euro, headed for its biggest weekly decline since January 2006, as traders increased bets that the Federal Reserve will cut interest rates again to avert a recession.

The dollar dropped versus 13 of the 16 most-traded currencies this week, falling 2.5 percent versus the euro before a government report today that is forecast by economists to show spending in the U.S. posted the smallest gain in more than a year last month. New Zealand's dollar rose after a government report showed the nation's economic growth accelerated at the fastest annual pace in three years in the fourth quarter.

``The U.S. may have already entered into a recession,'' said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly traded lender by assets. ``The Fed will keep lowering rates to defuse criticism that it always falls behind the curve. I am super dollar bearish.''

The dollar fell to $1.5812 per euro at 8:54 a.m. in Tokyo from $1.5779 in late New York yesterday and $1.5431 a week ago. The U.S. currency was at 99.53 yen from 99.65 yesterday and 99.58 a week ago. Japan's currency was little changed against the euro at 157.38, following a 2.5 percent loss this week.

The dollar may fall to $1.60 a euro next month, Kato forecast. That would surpass the low of $1.5903 reached March 17, the weakest level since the European currency debuted in 1999.

The New Zealand dollar rose against all 16 of the most- traded currencies, gaining to 80.61 U.S. cents from 80.35 cents in New York yesterday, and 80.25 yen from 80.06 yen.

Sixth Quarterly Loss

The U.S. dollar has fallen 7.7 percent against the euro this year, heading for its sixth straight quarterly loss and the biggest since 2004 as the Federal Reserve slashed interest rates by 3 percentage points since September to 2.25 percent to kick start economic growth.

Futures on the Chicago Board of Trade show traders increased bets the Fed will lower its benchmark target lending rate by a half-percentage point at a meeting ending April 30. The futures showed a 42 percent chance of a reduction of that size, compared with 36 percent the prior day. The remaining bets were for a cut of a quarter-point.

U.S. stocks dropped the most in a week on concern banks and securities firms will add to the $208 billion in asset writedowns and credit losses stemming from the collapse of the U.S. subprime-mortgage market since the start of 2007.

`Head South'

``With U.S. stocks falling amid concern over additional writedowns in U.S. financial institutions, there is still no situation for the dollar to recover,'' Masafumi Yamamoto, the Tokyo-based head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc, the fourth-biggest currency trader, wrote in a research note today. ``The dollar has further room to head south.''

The dollar may fall to $1.62 per euro by the middle of the year, Yamamoto forecast.

Japan's currency was little changed after a government report showed Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the government's statistics bureau said in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

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