Dollar Poised for Second Weekly Drop Versus Euro on Fed Outlook

By Min Zeng and David McIntyre

Oct. 19 (Bloomberg) -- The dollar is poised to fall for a second week against the euro as speculation increased the U.S. housing slump may tip the economy into recession, forcing the Federal Reserve to cut interest rates again.

The U.S. dollar traded near yesterday's record low versus Europe's currency after Bank of America Corp. reported about $4 billion in trading losses, stoking concern subprime mortgage investments are hurting corporate earnings and economic growth. The dollar may also weaken as speculation wanes that its 7.7 percent decline this year versus the euro will be highlighted at the Group of Seven meeting today.

``The weakening dollar trend is likely to go a bit further as the market raised its outlook for U.S. rate cuts,'' said Jonathan Cavanagh, a strategist at Westpac Banking Corp. in Sydney. ``I don't expect much on the currency side from the G- 7.''

The dollar traded at $1.4294 per euro at 8 a.m. in Tokyo from $1.4295 late in New York yesterday, when it touched $1.4310, the weakest since the euro's debut in January 1999. The U.S. currency was at 115.49 yen from 115.63 yen yesterday, when it reached the lowest in two weeks. The dollar has lost 0.7 percent this week against the euro and 1.7 percent versus the yen.

Dollar Index

The yen was headed for a gain against all 16 of the world's most-active currencies this week as signs of a slowdown in the world's biggest economy prompted traders to pare holdings of higher-yielding assets bought with loans in Japan. The yen climbed to 165.02 per euro, compared with 166.75 at the end of last week. It rose to 103.46 against the Australian dollar, compared with 106.39 on Oct. 12.

In so-called carry trades, investors secure funds in countries with lower borrowing costs and buy assets in countries with higher rates, earning the spread between the two. The Bank of Japan's benchmark borrowing cost is 0.5 percent, compared with the European Central Bank's 4 percent, the Fed's 4.75 percent rate and Australia's 6.5 percent.

Bank of America Corp., the second-largest U.S. bank, said yesterday profit fell 32 percent in the third quarter. The International Monetary Fund cut its forecast for 2008 U.S. growth this week to 1.9 percent from 2.8 percent.

The New York Board of Trade's dollar index touched 77.478 yesterday, the weakest since the index began in 1973, down from its 2007 high of 85.43 on Jan. 26.

G-7 Meeting

The G-7 meeting, the first since credit markets sold off in August, will address liquidity conditions and the role of credit-rating companies, officials said. The group, made up of the U.S., U.K., Japan, Germany, Canada, Italy, and France, is expected to release a statement after 6 p.m. in Washington.

Nations sharing the euro are split on its strength. While French President Nicolas Sarkozy has said the euro's appreciation is hurting European exports, German Finance Minister Peer Steinbrueck said he prefers ``a strong euro.'' U.S. Treasury Secretary Henry Paulson on Oct. 16 brushed aside suggestions he'll face criticism from Europeans that a weaker dollar is taking an unfair toll on exports priced in euros.

Getting the U.S. government ``to endorse a broad support package for the dollar is going to be difficult,'' said Russell Jones, head of global fixed-income and currency research at RBC Capital Markets, the investment-banking arm of Canada's biggest lender by assets. ``The most likely currency specifics in the G- 7 communiqué will again focus on China and Asia.''

Traders raised bets the Fed will reduce borrowing costs on Oct. 31, after a government report this week showed housing starts slumped to a 14-year low and Standard & Poor's cut ratings on $23.4 billion of mortgage securities.

Interest-rate futures traded on the Chicago Board of Trade show a 70 percent chance the Fed will lower its target rate for overnight loans between banks a quarter-percentage point to 4.5 percent this month, following a half-point cut on Sept. 18. The odds were 32 percent a week ago.

``The downward pressure on the dollar has really been accelerating as people become a little bit more negative to the U.S. economy,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.