Dollar Falls Versus Euro in Third Week on Fed Outlook

By Ye Xie and Bo Nielsen


Jan. 12 (Bloomberg) -- The dollar fell for a third week versus the euro, its longest losing streak since November, on speculation the Federal Reserve will increase the pace of interest rate cuts to avoid a recession.

The U.S. currency declined 1 percent on Jan. 10, its biggest one-day drop in almost two months, when Fed Chairman Ben S. Bernanke said more interest-rate cuts ``may well be necessary'' to offset the ``downside risks'' to economic growth. Data next week may show retail sales stalled in December, the housing slump deepened and consumer price inflation slowed.

``The Fed will act to cut interest rates very aggressively to prop up the economy,'' said Fabian Eliasson, vice president of foreign exchange sales at Mizuho Corporate Bank in New York. ``The dollar will suffer from the interest-rate differential perspective.''

The dollar fell 0.2 percent to $1.4776 per euro, from $1.4743 on Jan. 4. The euro strengthened 0.4 percent to 160.79 yen, from 160.09. The dollar gained 0.2 percent to 108.84 yen, from 108.60.

Fed funds futures contracts on the Chicago Board of Trade yesterday showed 34 percent odds the Fed will cut its 4.25 percent target rate for overnight bank loans to 3.5 percent by its Jan. 30 meeting, compared with no chance on Jan. 10. The odds of a half-point cut were 66 percent, down from 88 percent on Jan. 10, and up from 6 percent a month ago.

Dollar's Decline

European Central Bank President Jean-Claude Trichet kept the main refinancing rate at 4 percent on the same day Bernanke spoke, and said his central bank will ``not tolerate'' an inflation spiral.

The dollar fell 9.5 percent against the 15-nation European currency last year when the Fed lowered interest rates 1 percentage point.

``I'm in the dollar-bear camp,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. ``Economic standings in other countries are faring better than ours. The dollar needs to depreciate another 4 to 5 percent before it starts to offer value.''

U.S. Treasury Secretary Henry Paulson said yesterday the U.S. economy slowed ``rather materially'' at the end of 2007, and any steps to jump-start growth will be ``temporary.''

Retail Sales

Retail sales in the U.S. were probably unchanged last month, after increasing 1.2 percent in November, according to the median forecast of 61 economists in a Bloomberg News survey. The Commerce Department will release its report on Jan. 15.

Consumer prices may have increased 0.2 percent in December, after rising 0.8 percent in the previous month, according to the median forecast in a separate Bloomberg survey. The data will be released on Jan. 16.

A separate report might show the next day that builders in December broke ground on 1.145 million new homes at an annual rate, down from 1.187 million in the prior month, according to another Bloomberg News survey of 59 economists. It would be the lowest since March 1993.

``If we do see retail sales are flat and inflation subsides, an inter-meeting cut is possible,'' said Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York.

`Under Pressure'

Goldman Sachs Group Inc. this week cut its forecast for the dollar on expectations the U.S. may slip into a recession. The dollar will decline to $1.51 against the euro in the next three to six months, compared with its previous forecast of $1.43, the New York-based bank said in a research note.

Some analysts say the dollar's decline may be limited as the U.S. economy's weakness will drag down global growth.

``The spillover effects from the U.S. into the world economy are likely to be much higher than the market originally anticipated,'' said Ian Stannard, foreign-exchange strategist at BNP Paribas SA in London. ``From that perspective, we are likely to see the euro-dollar coming under pressure.''

The dollar will probably trade at $1.47 per euro and 109.4 yen at the end of the first quarter, according to the median forecast of 32 analysts, traders and investors surveyed by Bloomberg News between Jan. 3 and Jan. 8.

The U.S. currency will finish at $1.40 per euro and 107.5 yen by year-end, the survey estimated.