Dollar May Extend Gain Versus Euro as Credit Squeeze Spreads

By Bo Nielsen


Nov. 30 (Bloomberg) -- The dollar may extend a rally against the euro and pound on concern the reluctance of banks to lend is spreading to Europe.

The U.S. currency gained yesterday as the cost of borrowing in euros for one month rose by a record amount as banks sought funds to cover their commitments through to the start of next year. A government report today is forecast to show personal spending in the U.S. increased 0.3 percent last month.

``There's a growing concern about a global growth slowdown as the U.S. drags down other economies,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of MF Global Ltd., the world's largest broker of exchange- traded futures and options contracts. ``Nobody is quite sure how much damage is being done to the European credit markets, but their markets seem to be in dire straits as well.''

The U.S. currency, which has fallen 11 percent on a trade- weighted basis this year, traded at $1.4744 per euro and 109.94 yen at 7 a.m. in Tokyo. It gained 0.7 percent versus the euro and 1 percent against the pound yesterday. The euro bought 162.08 yen, falling 0.8 percent yesterday.

Malpede forecasts the dollar may strengthen to as much as $1.455 versus the euro in the next two weeks.

Separate data may show the Federal Reserve's preferred gauge of inflation was 1.8 percent in the 12 months through October, according to the median forecast of 29 economists surveyed by Bloomberg. Fed officials, including Chairman Ben S. Bernanke, have said they would be comfortable with the gauge between 1 percent and 2 percent.

Bernanke will speak in Charlotte, North Carolina, on the national and regional economies at 6:45 p.m. local time.

`A Long Way'

Chief Economist Jim O'Neill of Goldman Sachs Group Inc. in New York said the dollar's slide may soon end.

``It's fallen a long, long way,'' O'Neill said at the University of Oxford on Nov. 28. ``I personally think that a year from today the dollar will be quite a bit stronger.''

He also led a group of analysts in a report forecasting ``a gradual relaxation of credit concerns in the financial sector over the coming months.''

The yield on the March Euribor interest-rate futures contract was unchanged yesterday at 4.4 percent. It has declined 33 basis points since reaching 4.73 percent on July 6. The yield on the 90-day sterling interest-rate futures contract for June fell 8 basis points to 5.33 percent. It was 6.4 percent on July 17. A basis point is 0.01 percentage point.

Housing Slump

The dollar has declined against 15 of the 16 major currencies this year amid the worst housing market slump since 1991 and a credit squeeze that sent three-month interbank borrowing costs to the highest since 2001. Policy makers cut the benchmark rate twice to 4.5 percent to keep the economy out of recession.

Borrowing costs in the U.K. are 5.75 percent after five increases since 2006, and 4 percent in the euro region after eight increases since 2005.

``Selling the dollar has been one of the easiest trades this year, but it's not a one-way bet at the moment,'' said Mark Meadows, strategist at currency-trading company Tempus Consulting Inc. in Washington. ``You're starting to see evidence that the subprime crisis is spreading and that other central banks may have to hold, or even cut, interest rates.''

The London interbank offered rate that banks charge each other for euro loans that only come due after the end of 2007 climbed 64 basis points to 4.81 percent yesterday, the British Bankers' Association said. The rate charged for dollars rose 40 basis points to 5.23 percent.

The dollar will gain to $1.44 per euro and 112 against the yen by the end of June, according to the median forecast of 39 analysts and brokerages surveyed by Bloomberg.

Futures contracts on the Chicago Board of Trade showed yesterday traders see a 100 percent chance the Fed will lower its target for overnight loans between banks at least a quarter- percentage point to 4.25 percent on Dec. 11. The chance of a cut to 4 percent is 26 percent.