Dollar Trades at Record Low Versus Euro as Credit Losses Mount

Dollar Trades at Record Low Versus Euro as Credit Losses Mount

By Ye Xie and Bo Nielsen

March 14 (Bloomberg) -- The dollar traded at a record low against the euro and close to the weakest level in 12 years versus the yen on concern that widening losses in credit markets may further crimp economic growth in the U.S.

The dollar yesterday fell below 100 yen for the first time since 1995 and declined to almost one-for-one with the Swiss franc. The tumble in the world's reserve currency drove gold to a record above $1,000 an ounce as investors sought shelter in the metal. The dollar traded above $1.56 per euro for a second day before a private report today that may show U.S. consumer confidence fell this month to the lowest in 16 years.

``We are having a vicious circle of liquidity crisis, lower asset prices and a weaker dollar,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut.

The dollar traded at $1.5642 per euro at 6:26 a.m. in Tokyo, after touching $1.5645 per euro yesterday, the weakest since the European currency's debut in 1999. The dollar traded at 100.47 yen, after touching 99.77 yen, the weakest level since October 1995. It slid to a record low of 1.0045 Swiss francs. The yen traded at 157.17 per euro.

The U.S. currency yesterday declined against a basket of six major trading partners to the lowest since the index began in 1973. The Dollar Index traded on ICE Futures in New York reached as low as 71.795. The dollar traded at $2.0332 per pound, touching the weakest since December.

`Measuring the U.S.'

The dollar's decline started after a Carlyle Group fund defaulted on $16.6 billion of debt. The group said lenders will seize the assets of its mortgage-bond fund, a day after Drake Management LLC said it may shut its largest hedge fund, spurring concern that losses will widen.

``The weakening, in reality, is a reflection on how the world is measuring the U.S.,'' said Thomas Sowanick, who helps manage $10 billion as chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey. ``Until there is a unified central bank effort to support the dollar, the path of least resistance will be down.''

Treasury Secretary Henry Paulson reiterated support yesterday for a ``strong dollar'' that reflects economic fundamentals.

Japan sold yen on the four occasions since 1995 when the currency approached 100 to support exporters including Toyota Motor Corp., the world's second-biggest automaker. The Bank of Japan sold 14.8 trillion yen ($148 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.

`Short Trip'

The yen may rise as high as 95 per dollar, according to forecasts this month by Citigroup Inc., the third-biggest currency trader, Lehman Brothers Holdings Inc., the fourth- biggest U.S. securities firm, and Mizuho Financial Group Inc., Japan's second-largest publicly traded bank. Deutsche Bank AG and UBS AG, the two biggest currency traders, had predicted the dollar would hold above 100.

The dollar's decline below 100 yen ``may be a very short trip,'' said Michael Woolfolk, a currency strategist in New York at Bank of New York Mellon Corp., in an interview on Bloomberg TV. The Bank of Japan ``will be there; we're not going to see 95'' yen.

The Bank of Israel yesterday said it bought foreign currency for the first time since 1997, causing the shekel to pull back from an 11-year high against the dollar. Brazil's government this week imposed a tax on foreigners' purchases of local debt on March 12 to slow a rally that has driven the real up 62 percent in the past three years.

The Group of Seven, which next meets April 12-13 in Washington, may signal its intent to consider coordinated intervention, UBS strategists wrote in a March 3 report. Unilateral intervention ``seems unlikely'' as Japan's economy has grown every year since 2002, it said.

Carry-Trade Exit

Central banks intervene in the foreign-exchange market when they buy or sell currencies to influence exchange rates.

The yen also gained as investors exited so-called carry trades, in which they borrow in a country with low interest rates and buy higher-yielding assets elsewhere, earning the spread between the two. The risk is that currency moves erase those profits.

Japan's benchmark rate of 0.5 percent compares with 3 percent in the U.S., 4 percent in Europe, 7.25 percent in Australia and 8.25 percent in New Zealand.

Carlyle Capital Corp., co-founded by David Rubenstein, said in a statement it defaulted on about $16.6 billion of debt as of March 12. Lenders will ``promptly'' take over all of its remaining assets and any remaining debt is expected ``soon'' to go into default, it said.

Falling Confidence

The yen has rallied 13 percent against the dollar as the Fed cut rates amid the worst housing slump in a quarter of a century and $190 billion of U.S. subprime-mortgage-related losses and markdowns at the world's biggest financial institutions.

The biggest job losses in five years and record fuel costs are eroding U.S. consumer confidence and spending, which accounts for more than two-thirds of the economy. Lehman and JPMorgan Chase & Co. last week said the U.S. is headed into a recession.

A Reuters/University of Michigan's report today will probably show U.S. consumer confidence fell this month to the lowest in 16 years, according to the median forecast in a Bloomberg News survey.

``Dollar-yen is going lower,'' said Ray Farris, head of foreign-exchange strategy at Credit Suisse in London. ``It will definitely overshoot our 98 forecast in the very near term. Our forecast was for the dollar to reach 98 in three months. The big question now is whether there will be intervention.''

`Cheap' Yen

Japanese officials are unlikely to intervene now in the foreign-exchange market because the yen is ``cheap'' compared with other currencies, Eisuke Sakakibara, dubbed ``Mr. Yen'' when he was Japan's top currency official from 1997 to 1999, said in an interview on March 6.

The yen's real effective exchange rate, measured against 15 currencies of major trading partners including China, Europe and Canada, is 99.5, according to Bank of Japan figures. The rate averaged 121.9 in the first quarter of 2004, when the bank last intervened on behalf of the Ministry of Finance.

``The yen hasn't played its part in terms of dollar depreciation,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup in New York. As carry trades unwind, ``we could find ourselves moving down toward 95 very, very quickly in the next couple of weeks.''