By Stanley White and Ron Harui
February 1, 2008
Feb. 1 (Bloomberg) -- The dollar headed for its biggest weekly decline in a month against the euro as traders bet the Federal Reserve will keep cutting the benchmark interest rate to avert a recession.
The dollar fell versus 15 of the 16 most-traded currencies this week and dropped the most against the Australian and New Zealand dollars. A U.S. government report today will probably show companies hired at a slower pace than last year's average in January, supporting the case for further rate reductions.
``It's impossible to buy and hold dollars as a long-term trade as there's still too much uncertainty about how far the Fed will have to cut rates,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It would take some exceptional jobs numbers to help the dollar.''
The dollar lost 1.2 percent this week to $1.4864 per euro as of 2:40 p.m. in Tokyo from $1.4681 on Jan. 25. It reached $1.4967 per euro on Nov. 23, the weakest since the European currency debuted in 1999. Against the yen, the dollar traded at 106.42, falling 0.3 percent this week. The euro rose 1 percent to 158.16 yen.
The dollar may move between 106.15 yen and 107 yen today, Ishikawa forecast.
Yield Spreads
The dollar declined 1.8 percent this week to 89.59 U.S. cents versus the Australian dollar and 2.5 percent against New Zealand's currency to 78.78. It fell 1.3 percent versus the Swiss franc and reached a record low of 1.0758 yesterday. The Singapore dollar and Malaysia's ringgit reached the highest in more than a decade this week versus the U.S. currency.
The yield advantage on Australian and New Zealand two-year government bonds over similar-maturity Treasuries widened to the most in 16 years. Australia's spread increased to 4.57 percentage points, the highest since February 1991. New Zealand's premium was 5.16 points, near the 5.29 points reached on Jan. 22, the widest since January 1991.
The Fed lowered the target rate for overnight lending between banks by 50 basis points to 3 percent on Jan. 30 to prevent the economy from slipping into a recession. Interest- rate futures on the Chicago Board of Trade show a 72 percent likelihood the central bank will cut the rate to 2.5 percent at the next meeting on March 18 compared with zero odds a week ago.
Lehman Forecast
Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm by market value, lowered its forecast for the dollar to $1.50 per euro by the end of March from $1.45 previously.
``The Fed's more aggressive policy response in the last few weeks argues for more dollar weakness, especially against those currencies that benefit from weaker growth or where policy remains tight,'' Jim McCormick, head of global currency research at Lehman in London, wrote in a research note yesterday.
The U.S. added 70,000 jobs in January compared with a four- year low of 18,000, according to a Bloomberg News survey of economists before the Labor Department report due at 8:30 a.m. Washington time. The average for last year was 110,000.
The dollar dropped 0.7 percent against the yen on Jan. 4 to complete a five-day loss of 3.3 percent, when the December payrolls were issued. The 18,000 jobs created was the least since August 2003, while the jobless rate held at a two-year high of 5 percent.
The euro's gains against the dollar may be limited on speculation the European Central Bank will need to cut interest rates from 4 percent as the economy slows, reducing the appeal of assets denominated in the currency.
ECB Rates
``Signs are emerging that Europe's economy isn't doing so well,'' said Hideaki Inoue, chief manager of derivatives and fixed-income investment in Tokyo at Mitsubishi UFJ Trust and Banking Corp., a unit of Japan's largest publicly traded bank by assets. ``It's a factor for selling the euro,'' which may decline to $1.4800 and 157.00 yen today, he forecast.
An index of confidence among executives and consumers in the countries that use the euro dropped to the lowest level since January 2006, the European Commission said yesterday in Brussels. Inflation accelerated to 3.2 percent, the highest in 14 years, a separate report showed.
The dollar may rise to $1.48 per euro by the end of this quarter and rebound to $1.40 by year-end, according to the median forecast of 48 analysts surveyed by Bloomberg News.
Mizuho Corporate Bank Ltd., Japan's second-largest publicly traded lender by assets, cut its year-end dollar forecast against the yen because mortgage and credit-market losses will lead the U.S. economy into a recession.
The bank predicts the dollar will fall to more than a decade-low of 95 yen by the end of 2008 from a previous estimate of 103 made in December.
``The dollar will be mired in weakness,'' Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate, said in a telephone interview in Tokyo. ``With broad asset-backed securities further deteriorating, the credit crunch will keep buffeting the U.S. economy.''
Source: Bloomberg
Dollar Heads for Weekly Decline Against Euro on Rate Outlook
