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Dollar decline after slow in rate hikes { December 2006 } Original Source Link: (May no longer be active)
http://quote.bloomberg.com/apps/news?pid=10000006&sid=ae7moluhCCbo&refer=homehttp://quote.bloomberg.com/apps/news?pid=10000006&sid=ae7moluhCCbo&refer=home
Dollar Has Biggest Weekly Decline in 3 Years Versus the Euro
Jan. 7 (Bloomberg) -- The dollar had its biggest weekly decline in more than three years versus the euro after the Federal Reserve suggested it is closer to halting its string of interest- rate increases.
A change in Fed rate policy may stem or even erode the yield advantage of U.S. assets. Higher U.S. rates compared with Europe and Japan helped push the dollar more than 14 percent higher versus the euro and the yen in 2005. The central bank next meets on Jan. 31 and March 28.
``The Fed is going to raise rates in January, but another rate increase is now up in the air'' for March, said Brian Garvey, senior currency strategist at State Street Global Markets in Boston. ``That's causing dollar weakness.''
Against the euro, the dollar declined 2.6 percent to $1.2151 at 5 p.m. yesterday from $1.1849 a week earlier. It was the dollar's biggest weekly drop since June 2002. The U.S. currency fell 2.8 percent to 114.44 yen from 117.75.
The U.S. currency retreated against 15 of the 16 most actively traded currencies this week after the Fed said, in the minutes from its Dec. 13 meeting released on Jan. 3, that the number of future rate increases ``probably would not be large.''
The Fed raised its benchmark rate eight times last year to 4.25 percent. The European Central Bank lifted its key rate once to 2.25 percent while the Bank of Japan held at almost zero.
Reducing Bets
The minutes of the Fed's December meeting prompted interest- rate futures traders to adjust their bets for rate increases in the first quarter. They are still pricing in a quarter-percentage point rise on Jan. 31. Bets for an increase at the March meeting fell to 52 percent from 60 percent a week ago.
The dollar fell the most in three weeks against the yen and dropped versus the euro yesterday as traders said U.S. job growth in December isn't strong enough to sustain the currency's yearlong rally.
The dollar declined even though the Labor Department revised November's figure higher, producing a two-month increase of more than 400,000. Employers added 108,000 jobs last month, fewer than forecast by 62 economists.
``The market is using any excuse to sell dollars,'' said Mitul Kotecha, head of currency strategy in London at Calyon, the securities unit of Credit Agricole SA. Traders have ``been swayed by the headline and got a little carried away.''
The increase in employment capped the second straight year American employers added more than 2 million workers. The jobless rate of 4.9 percent is less than half Germany's.
Dollar-Bear `Opportunities'
``Dollar bears are looking for opportunities to get into the market,'' said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Mellon Financial Corp. ``The dollar has been on the back foot. The bears are trying to get in and get some momentum going.''
The dollar also declined on Jan. 3 after an industry report showed U.S. manufacturing growth slowed. The Institute for Supply Management, a private industry group, said its factory index declined to 54.2 from 58.1 in November. Economists expected an index of 57.5, according to the median of 53 forecasts in a Bloomberg survey. A reading above 50 indicates expansion.
An index of manufacturing in the euro region rose to 53.6 this month, from 52.8 in November, said NTC Research Ltd., which compiled the measure based on a survey of about 3,000 purchasing managers for Royal Bank of Scotland Group Plc.
The yield premium on two-year Treasury notes over similar maturity German debt widened to 1.60 percentage points this week from 1.54 percentage points on Dec. 30. The gap widened to the highest in five years in 2005.
``Expectations about growth are the same but it doesn't do anything to sway the negative sentiment'' about the dollar, said Meg Browne, a currency strategist at Brown Brothers Harriman & Co. in New York. ``In a short-term market it's more about positioning and orders.''
European Economy
The euro also has been boosted this week by signs of faster economic growth in Europe, which may encourage the ECB to lift interest rates again after the first increase in five years.
European consumer confidence last month rose to the highest in more than five years, German unemployment fell the most in more than a decade and service industries grew at the fastest pace in almost two years, reports showed this week.
``Good economic figures will surely be euro supportive,'' said Tomoko Fujii, a currency strategist at Bank of America N.A. in Tokyo. ``The euro-zone economy is expanding faster than expected,'' and will help drive the euro to $1.23 per dollar by March 31, she said.
Interest-rate futures suggest some traders are betting the ECB will raise rates at least twice in the first half of the year. The yield on the three-month Euribor contract due June 2006 was 2.78 percent compared with the central bank's benchmark rate of 2.25 percent.
The contracts settle to the three-month euro inter-bank offered rate, which has averaged 0.15 percentage point over the ECB rate since the euro's introduction in 1999.
Last Updated: January 7, 2006 09:05 EST
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