Dollar Heads for Biggest Weekly Drop Against Euro in a Month

Dollar Heads for Biggest Weekly Drop Against Euro in a Month

By Kosuke Goto and Yumi Teso


March 28 (Bloomberg) -- The dollar headed for its biggest weekly decline in a month against the euro as traders increased bets that the Federal Reserve will cut interest rates to avert a recession and curb credit-market losses.

The currency was also poised for losses against the yen before a government report today that may show slowing growth in U.S. consumer spending. New Zealand's dollar rose after a statistics bureau report showed the nations' economic growth accelerated at the fastest annual pace in three years in the fourth quarter.

``I am super dollar bearish,'' said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly traded lender by assets. ``The U.S. may have already entered a recession. The Fed will keep lowering rates to defuse criticism that it always falls behind the curve.''

The dollar weakened to $1.5799 per euro at 11:54 a.m. in Tokyo from $1.5779 in late New York yesterday and $1.5431 a week ago. The U.S. currency slid to 99.51 yen from 99.65 yesterday and 99.58 a week ago. Japan's currency was at 157.02 per euro from 157.21, following a 2.2 percent loss this week.

The dollar may fall to $1.60 a euro next month, Kato forecast. That would surpass the low of $1.5903 reached March 17, the weakest level since the European currency debuted in 1999.

New Zealand's currency rose to as high as 80.68 U.S. cents before trading at 80.47 cents, compared with 80.35 cents in New York. It also climbed to as high as 80.40 yen before trading at 80.13 yen from 80.06 yen yesterday.

Asian Currencies

The Taiwan dollar dropped on speculation the central bank will stem its gains to protect exporters, after the fastest advance this quarter since June 1987. It weakened 0.7 percent to NT$30.377. The central bank probably intervened to sell the nation's dollar at least twice yesterday, according to a Credit Suisse Group report.

South Korea's won fell 0.6 percent to 993.55 per dollar after a central bank report showed a third consecutive current account deficit and Yonhap news agency reported that North Korea had fired short-range missiles.

The U.S. dollar has fallen 7.5 percent against the euro this year, heading for its sixth straight quarterly loss and the biggest since 2004 as the Federal Reserve slashed interest rates by 3 percentage points since September to 2.25 percent. Personal spending rose 0.1 percent last month, the smallest gain in more than a year, according to a separate Bloomberg survey before the Commerce Department report today.

The Dollar Index traded on ICE Futures in New York, which tracks the currency against those of six trading partners, fell to 71.642 today from 71.660 yesterday. It reached a record low of 70.698 on March 17.

Futures Bets

Futures on the Chicago Board of Trade show traders increased bets the Fed will lower its benchmark target lending rate by a half-percentage point at a meeting ending April 30. The futures showed a 42 percent chance of a reduction of that size, compared with 36 percent the prior day. The remaining bets were for a cut of a quarter-point.

U.S. stocks dropped the most in a week on concern banks and securities firms will add to the $208 billion in asset writedowns and credit losses stemming from the collapse of the U.S. subprime-mortgage market.

The yen snapped a five-day losing streak against the euro as a drop in stocks prompted traders to reduce holdings of higher-yielding assets funded with loans from Japan. It rose against 12 of the 16 most-traded currencies as the MSCI Asia- Pacific Index of regional stocks fell 0.4 percent, down for a second day.

``Risk aversion among investors still prevails, buoying the yen,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research, a unit of Japan's second-largest brokerage. ``U.S. subprime problems won't be solved soon, and stocks will remain sluggish in the first half of this year before rebounding.''

The yen may rise to 95 per dollar by June 30, Kameoka forecast.

Carry Trades

In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two. The risk is currency moves erode those profits.

The yen also strengthened against the dollar after a government report showed Japan's consumer prices rose at the fastest pace in a decade in February, prompting some investors to cut bets the Bank of Japan will lower its benchmark 0.5 percent interest rate this year.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the statistics bureau said.

``The rising CPI supports the case for the BOJ to gradually raise interest rates,'' said Osamu Takashima, chief analyst for global market sales and trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``Such a scenario is yen positive. There is more room for the dollar to fall and the yen to rise.''

The yen may advance close to 90 per dollar by the end of this year, Takashima said.

There is a 46 percent chance the central bank will reduce the benchmark interest rate to 0.25 percent by December, according to calculations by JPMorgan Chase & Co. using interest-rate swaps. The odds were down from 53 percent on March 25.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Yumi Teso in Singapore at yteso@bloomberg.net.

Last Updated: March 27, 2008 23:18 EDT