Monday, September 15, 2008

Dollar Trades Near 2-Month Low Versus Yen on Fed Rate Cut Bets

By Stanley White and Ye Xie

Sept. 16 (Bloomberg) -- The dollar traded near a two-month low against the yen on speculation the Federal Reserve will cut the target lending rate today after Lehman Brothers Holdings Inc. filed for bankruptcy.

Japan's yen and the Swiss franc may extend gains against major currencies as the Wall Street firm's collapse encourages investors to sell higher-yielding assets and pay back low-cost loans in Japan and Switzerland. The dollar rose against the Brazilian real and the Mexican peso yesterday as widening credit market losses prompted investors to seek the relative safety of U.S. Treasuries.

``Dollar selling is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``A rate cut is likely because the Fed needs to do something to stabilize the financial system. Risk aversion will also help the yen rise.''

The dollar traded at 104.35 yen at 7:56 a.m. in Tokyo from 104.66 yesterday. It earlier touched 104.19 yen, the lowest level since July 16. The dollar fell to $1.4268 per euro from $1.4243. The pound declined to $1.7970 from $1.8007. The dollar may weaken to 103.90 yen today, Soma forecast.

Japan's currency rose 0.2 to 148.76 per euro and 1.8 percent to 83.31 versus the Australian dollar as Lehman's bankruptcy prompted investors to reduce carry trades in which they borrow in countries with low borrowing costs and buy higher-yielding assets elsewhere.

Lehman's Bankruptcy

``Carry trades had a double-whammy as concern about financial firms fed into risk aversion and concern about global growth compounded the hit,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``It's a perfect storm.''

Lehman filed for the biggest bankruptcy filing in history after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based bank. Bank of America, the biggest U.S. consumer bank, instead agreed to acquire Merrill Lynch & Co. for about $50 billion, as the credit crisis claimed another of America's oldest financial companies.

``It's hard to imagine anything more cataclysmic than this,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It will be hard to top that kind of news flow. The yen hasn't looked so good for quite a while.''

American International Group Inc., the largest U.S. insurer by assets, was given permission to access $20 billion of capital in its subsidiaries to free up liquidity, New York Governor David Paterson said yesterday.

Franc's Gains

The Swiss franc increased 1.3 percent to 1.5869 per euro yesterday and 2 percent to 1.1079 per dollar, the biggest gain since June 6. Japan's 0.5 percent target lending rate and Switzerland's 2.75 percent benchmark compare with 4.25 percent in Europe and 12 percent in South Africa.

Futures on the Chicago Board of Trade showed yesterday a 74 percent chance the central bank will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point today, compared with no chance a week ago.

Policy markers are scheduled to announce their decision at 2:15 p.m. in Washington. One hundred of 105 economists surveyed by Bloomberg News expected the Fed to keep the rate on hold, while the rest forecast a cut.

Implied volatility on one-month euro-dollar options surged to 14.34 percent yesterday, the highest level since the aftermath of the Sept. 11, 2001, terrorists attacks, indicating traders see more price fluctuation in the next month.

Dollar's Gains

The dollar rose 1.9 percent to 1.8149 Brazilian real yesterday and 1.4 percent to 10.7437 Mexican pesos as U.S. investors repatriated capital and bought Treasuries.

``The vicious cycle of the credit crunch causing a slowdown in the U.S. economy will continue,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``For the dollar, there will be a flight to quality into Treasuries.''

A rally in Treasuries pushed the yield on the two-year note down 0.42 percentage point to 1.78 percent yesterday, the most since the Sept. 11 attacks. It was the first time the yield fell below 2 percent since April. The 10-year note's yield dropped 0.20 percentage point to 3.52 percent.

The yield advantage of the benchmark 10-year note over comparable-maturity Japanese government securities decreased to 1.90 percentage points yesterday, the narrowest since 1993, making the U.S. securities less attractive.

Stocks tumbled yesterday, with the Standard & Poor's 500 Index dropping 4.7 percent. The Dow Jones Stoxx 600 Index retreated 3.5 percent.

The dollar has gained about 12 percent since touching an all-time low of $1.6038 per euro on July 15 as the European economy slowed and crude oil dropped 35 percent from its peak of $147.27 a barrel.

`` The appetite for the U.S. dollar has not reversed,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto. ``Risk reduction provides support.''

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