Dollar Gains on Speculation Fed's Actions Will Revive Growth

Dollar Gains on Speculation Fed's Actions Will Revive Growth

By Ron Harui and Kosuke Goto

March 24 (Bloomberg) -- The dollar rose, gaining the most against the Swiss franc, on speculation the Federal Reserve's interest-rate cuts and efforts to spur lending will help revive economic growth.

The U.S. currency has gained 2.4 percent against the euro and 2.6 percent versus the yen since March 17, the day before the Fed lowered its benchmark rate by 0.75 percentage point to 2.25 percent. The dollar also climbed as the Group of Seven nations may take coordinated action in foreign-exchange markets to counter the impact of a sinking U.S. economy.

``The dollar will remain firm in the near term,'' said Kosuke Hanao, head of currency sales in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ``The markets valued the Fed's relief measures last week as good ones.''

The dollar climbed to $1.5341 per euro, the highest since March 12, before trading at $1.5369 as of 2:42 p.m. in Tokyo, from $1.5431 in New York on March 21, when it posted its first weekly advance against the euro in more than a month. It also advanced to 99.82 yen from 99.58. Japan's currency traded at 153.42 per euro from 153.55.

Currency moves may be exaggerated because trading volumes are less than normal due to the Easter holiday, said Kenichiro Fujita, manager of derivatives marketing in Tokyo at Aozora Bank Ltd., Japan's ninth-largest publicly traded lender by assets. Markets are closed in the U.K., Australia and New Zealand.

Dollar Index Rebound

The U.S. Dollar Index traded on ICE Futures in New York, which tracks the value of the currency against six major counterparts including the euro and yen, rose 0.6 percent to 73.144. Gold fell 1.1 percent and crude oil dropped 1.6 percent.

The dollar climbed 0.9 percent versus the Swiss franc to 1.0180, 0.6 percent against the Norwegian krone to 5.2953 and 0.7 percent against Canada's dollar to 1.0302.

Taiwan's dollar gained against all 16 major currencies after Ma Ying-jeou won the presidential election, ending eight years of Democratic Progressive Party rule, on pledges to open ties with China and improve the economy. The island's dollar rose 1.1 percent to as high as NT$30.201 versus the U.S. currency, the strongest since October 1997.

The U.S. central bank on March 20 expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans. The Fed announced on March 11 a program to swap $200 billion in Treasuries for debt including mortgage-backed securities.

The Fed may need to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co.

Inflation Expectations

The Federal Open Market Committee on March 18 said that inflation expectations may have risen, even as they cut the benchmark interest rate three- quarters of a percentage point and began lending directly to big Wall Street dealers.

``The FOMC statement last week mentioned increased uncertainty over the inflation outlook, and in doing so, signaled growing reluctance to continue cutting rates,'' Ashley Davies, a strategist in Singapore at UBS AG, the second-largest currency trader, wrote in a research note today. ``This may be helping the U.S. dollar to stabilize.''

The dollar also strengthened on speculation the Group of Seven nations may make a coordinated intervention to counter the impact of a slowing U.S. economy, the weakest dollar since 1971 and the biggest currency fluctuations this decade.

``The risks of coordinated intervention are going to increase in the second quarter for sure as the dollar weakens further,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon, the securities unit of Credit Agricole SA, France's second-biggest bank.

Pennant Triangle Chart

The dollar may fall to 95.77 yen in two to three weeks, said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo, citing technical analysis.

The U.S. currency has formed a pennant that signals it's likely to extend its 10.6 percent decline this year, according to Suzuki. A pennant is formed when rising and descending trend lines intersect to form a triangle.

Futures on the Chicago Board of Trade show traders see a 56 percent chance of a half-percentage point cut in the Fed's overnight interest rate between banks to 1.75 percent at its meeting on April 30. The balance of bets are for a 0.25 percentage point cut.

The euro weakened against the dollar before a report this week that economists forecast will show German business confidence fell in March. The Ifo institute's sentiment index slipped to 103.5 from 104.1 in February, according to a Bloomberg News survey.

Euro Bets

The European Central bank will lower its main lending rate to 3.75 percent from 4 percent by mid-year and to 3.5 percent by year-end, according to the weighted average of 20 forecasts in a Bloomberg survey.

Figures from the Washington-based Commodity Futures Trading Commission showed last week that the difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 26,521 on March 18, compared with net longs of 29,099 a week earlier.

``Weak Ifo data will rekindle expectations of an ECB rate cut,'' Aozora Bank's Fujita said. ``A slowdown in the U.S. will slow Europe's economic growth, forcing central banks to lower rates in the U.S. and Europe.''

The single European currency may fall to $1.50 against the dollar by June 30, Fujita forecast.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.

Last Updated: March 24, 2008 02:17 EDT