Dollar Falls to Record Low Versus Euro Before Fed Rate Meeting

By Kosuke Goto

Oct. 29 (Bloomberg) -- The dollar fell to a record low against the euro on speculation the Federal Reserve will cut interest rates this week as a U.S. housing slump reverberates through the economy.

The U.S. currency also slid to its lowest in 23 years versus Australia's dollar as prospects the Fed will lower its 4.75 percent overnight lending rate between banks by at least a quarter-percentage point on Oct. 31 prompted investors to seek higher-yielding assets overseas. Yields on two-year Treasuries are near the lowest since September 2005.

``I remain bearish on the dollar,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``The U.S. has the lowest yields of all other major countries except Japan and Switzerland. This is sending people into a whole range of higher-yielding currencies.''

The dollar fell as low as $1.4426 per euro, the weakest since the introduction of the 13-nation common currency in 1999, before trading at $1.4408 as of 9:41 a.m. in Tokyo from $1.4393 in late New York on Oct. 26. It may drop as low as $1.4530 this week, Gibbs said.

The U.S. currency fell against 10 of the 16 most-actively traded currencies, declining the most against the higher- yielding dollars of New Zealand and Australia. It slid to 76.95 cents versus New Zealand's from 76.62 late last week and as low as 92.15 cents against Australia's dollar, the weakest since May 1984, before buying 92.07 from 91.84 on Oct. 26.

The U.S. dollar was at 114.25 yen from 114.19 yen.

`Alternative Investments'

``We will start to see some of these Middle Eastern countries, large holders of U.S. dollar funds, start to look at other alternative investment to seek higher returns,'' said Tobias Davis, senior currency dealer at Custom House Global Foreign Exchange in Sydney. ``Yield differentials are just too large.''

The dollar's 8 percent loss against the euro this year has prompted some politicians including French President Nicolas Sarkozy to warn that exports from the $10 trillion euro-region economy may suffer. At the same time, the cheaper dollar has buoyed U.S. shipments overseas. The nation's trade deficit in August narrowed to $57.6 billion, the least since January, the Commerce Department said Oct. 11.

Interest-Rate Futures

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will lower its benchmark overnight rate a quarter-percentage point to 4.50 percent this week, after reducing the rate a half-point on Sept. 18 in its first cut since 2003. Futures show an 8 percent chance of a half-point reduction on Oct. 31.

The European Central Bank will keep its key rate at 4 percent at a Nov. 8 meeting, according to the median forecast in a Bloomberg News survey. The Reserve Bank of Australia will increase its rate a quarter-percentage point to 6.75 percent on Nov. 7, a separate Bloomberg survey of economists shows. New Zealand's central bank held its rate at 8.25 percent last week.

The dollar also weakened on concern rising oil prices will hamper the U.S. economy, the world's biggest importer of the commodity. Oil rose to a record $92.43 a barrel in New York after Turkey's Foreign Minister yesterday said his government is considering ``all options'' including military action to deal with Kurdish rebels operating from Iraq.

``The tension is running high, pushing up oil prices,'' said Koichi Yoshikawa, head of foreign-exchange trading at BNP Paribas in Tokyo. ``This could make oil-producing nations independent of the dollar,'' which may fall to $1.45 a euro this year, he said.

A U.S. government report Oct. 31 may show growth in gross domestic product slowed to an annualized 3.1 percent rate last quarter, from 3.8 percent in the previous three months, according to the median estimate in a Bloomberg News survey.

Yen Carry Trade

The yen weakened against 14 of the 16 most-actively traded currencies, falling the most against the New Zealand and Australian dollars, as a stock rally spurred investors to buy higher-yielding assets financed by loans in Japan.

Japanese stocks followed gains in U.S. equities on Oct. 26, suggesting investors may increase so-called carry trades, by buying riskier assets funded with yen.

``A rise in stock prices means improvement in investors' risk appetite,'' said Junya Tanase, a currency strategist at JPMorgan Chase & Co. in Tokyo. ``Should stocks continue to advance, the yen will remain weak.''

Japan's currency may trade between 113 and 115 per dollar this week, Tanase said.

The yen fell to 164.79 per euro, the weakest since Oct. 19, from 164.34 in New York on Oct. 29.

Japan's Nikkei 225 Stock Average rose 1.1 percent today and the broader Topix index gained 1.8 percent.

The Japanese currency fell 0.4 percent to 87.85 versus the New Zealand dollar. It also declined to 105.09 against the Australian dollar, from 104.88.

In the carry trade,, investors borrow in countries with low interest rates and invest where rates are higher. Japan's benchmark overnight lending rate is 0.5 percent.