Dollar Approaches Record Low Versus the Euro on Rate Outlook

By Ye Xie

Oct. 13 (Bloomberg) -- The dollar approached an all-time low against the euro on speculation the interest-rate advantage that U.S. securities hold over Europe debt will narrow.

The U.S. dollar fell against 13 of 16 most-actively traded currencies this week, and reached a 31-year low against Canada's dollar. A government report on Oct. 17 is forecast to show U.S. housing starts declined to the lowest in 12 years, adding to expectations the Federal Reserve may cut borrowing costs to prevent the economy from going into a recession.

``The overall view is that the U.S. economic fundaments will weaken further,'' said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. ``That will have the Fed keep an easing bias. While the rest of the world is tightening, interest-rate differentials are working against the dollar.''

The dollar declined 0.3 percent against the euro this week to $1.4178, from $1.4136 on Oct. 5. It touched $1.4241 on Oct. 11, the weakest since Oct. 1 when it set an all-time low of $1.4283. The dollar yesterday fell to an intraday low of $1.0290 against the Canadian currency, the lowest since October 1976.

Builders broke ground on an annual rate of 1.283 million homes in September, compared with 1.331 million in the previous month, according to the median forecast of 62 economists in a Bloomberg News survey. The rate would be the lowest since June 1995.

The Fed

The Fed cut the target rate for overnight lending between banks a half-percentage point to 4.75 percent on Sept. 18, amid credit-market turmoil triggered by the worst housing slump in 16 years.

Interest-rate futures yesterday suggested a 32 percent chance the Fed will cut the rate to 4.5 percent on Oct. 31.

The European Central Bank's benchmark interest rate is 4 percent. ECB governing council member Axel Weber said on Oct. 11 that there may be an ``additional need'' to raise rates to keep inflation under control.

``We will have further upside potential in the euro-dollar by the end of this quarter,'' said Hans Guenter Redeker, global head of currency strategy at BNP Paribas SA in London. ``We assume the U.S. economy is weaker. We assume the Fed is going to cut the rate by the end of October. We assume there's another rate cut to follow by the end of this year.''

Redeker said the euro will rise to $1.46 by the end of this year.

Dollar Index

The New York Board of Trade's dollar index measuring its value against a basket of six major currencies, including the euro and yen, fell 0.1 percent this week to 78.187. It touched 77.657 on Oct. 1, the lowest since the index started in March 1973.

The dollar yesterday gained versus the euro and yen after a government report showed U.S. retail sales exceeded forecasts in September.

The yen fell against 15 of 16 major currencies this week after the Bank of Japan kept its key interest rate unchanged, prompting investors to borrow in Japan to buy higher-yielding assets elsewhere, in a practice known as the carry trade.

The central bank kept borrowing costs at 0.5 percent, the lowest among industrialized countries, on Oct. 11. That compares with an 8.25 percent benchmark interest rate in New Zealand and 6.5 percent in Australia.

Rate Decision

BOJ Governor Toshihiko Fukui said after the rate decision that policy makers need more time to gauge the effect of the U.S. subprime mortgage crisis on the global economy.

The yen fell for a fifth straight week against the euro, its longest losing streak since May, declining 0.8 percent to 166.75 per euro. The yen weakened to an all-time low of 168.99 versus Europe's currency on July 23. The yen fell 0.6 percent this week to 117.61 per dollar.

The implied volatility on one-month euro-yen options fell to 8.4 percent yesterday, the lowest in more than 11 weeks.

``Lower volatility gave investors more confidence to put carry trades on,'' Upadhyaya said. ``The yen sold off across the board.''

Futures traders increased bets the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed yesterday.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain, known as net shorts, was 45,757 on Oct. 9, compared with net shorts of 28,069 a week earlier.

Last Updated: October 13, 2007 08:42 EDT