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Dollar falls against euro betting on rate cuts { February 2008 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a73blAJuPsp4&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=a73blAJuPsp4&refer=home
Dollar Falls on Bets Fed Will Make Deeper Interest Rate Cuts
By Bo Nielsen and Agnes Lovasz
March 25 (Bloomberg) -- The dollar fell the most against the euro in almost two weeks on speculation the Federal Reserve will cut the target lending rate by as much as a half-percentage point next month to revive economic growth.
The U.S. currency weakened against the Australian and New Zealand dollars as a rally in European and Asian stocks encouraged investors to buy higher-yielding assets. Confidence among U.S. consumers probably fell to a five-year low in March as more Americans lost their jobs and gasoline prices climbed, economists said before a report today.
``The broader themes do point to U.S. economic weakness and ongoing pressure on the dollar,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto, in an interview with Bloomberg Radio. ``The Fed will continue to cut. It will go 50 basis points at the next meeting and then remain in a holding pattern to see the impact of its actions.''
The dollar fell 1 percent to $1.5572 per euro at 9:34 a.m. in New York, from $1.5423 yesterday. It declined 0.7 percent to 100.09 yen, from 100.74 yesterday. The euro advanced 0.3 percent to 155.87 yen, from 155.39.
The U.S. currency slipped against the Australian dollar to 91.36 U.S. cents from 90.59 cents and to 80.37 U.S. cents per New Zealand dollar from 79.77 cents.
The Icelandic krona surged against all 177 currencies tracked by Bloomberg News after the central bank unexpectedly raised its benchmark interest rate to 15 percent at an unscheduled meeting.
Icelandic Surge
The krona climbed almost 5 percent to 115.602 per euro today, before trading at 117.698, compared with 121.591 yesterday. Concern that credit losses will widen last week triggered a sell-off in the currency, causing it to slump 9.3 percent against the euro and to a record 127.985 on March 19.
The euro was buoyed before European Central Bank President Jean-Claude Trichet testifies to the European Parliament's economic and monetary affairs committee tomorrow. He said on March 6 anchoring inflation expectations is the ``highest priority'' after the central bank left its main interest rate unchanged at a six-year high of 4 percent.
Trichet will ``remain hawkish against inflation risks,'' said Koji Fukaya, a senior currency strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank. ``The euro has an upside risk with his speech.''
Any gain in the euro will be limited on speculation the credit-market crisis may prompt the Group of Seven nations, which begin a meeting on April 12 in Washington, to coordinate action on the foreign exchanges to halt the dollar's slide.
Papademos on Euro
European Central Bank Vice President Lucas Papademos called the euro's appreciation ``excessive'' and said the bank is closely watching currency markets.
``Recent movements in exchange rates have been excessive'' and are a ``cause for concern,'' Papademos said in an interview with Russia's Izvestia newspaper yesterday, according to a transcript issued by the ECB. ``We will continue to monitor foreign-exchange markets very closely.''
The MSCI World Index added 1.8 percent a day after JPMorgan Chase & Co. quadrupled its bid for Bear Stearns Cos. to about $10 a share, bolstering confidence in financial assets. The Standard & Poor's 500 Index fell almost 0.1 percent.
``With the news of Bear Stearns now well absorbed, many are of the belief that the worst is past us,'' BNP Paribas SA currency strategists led by London-based Hans-Guenter Redeker wrote in a research note today. ``Investors are using the opportunity to move back into high-yield assets, given that U.S. rates are now the lowest'' after Japan's in the industrialized world.
Interest Rates
The benchmark interest rate is 0.5 percent in Japan and 2.25 percent in the U.S., compared with 2.75 percent in Switzerland, 8.25 percent in New Zealand and 7.25 percent in Australia. The yen also fell 0.6 percent to 91.76 per Australian dollar and 0.3 percent to 80.64 per New Zealand dollar.
In carry trades, traders 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 fluctuations erase profit.
The U.S. economy slipped into a recession in the first three months of the year and will remain there in the second quarter, putting pressure on the dollar to weaken further, Deutsche Bank AG, the world's largest currency trader, said in a report yesterday.
Dollar Outlook
The dollar may weaken to $1.60 against the euro in the first half of the year, before strengthening to $1.45 by the end of the year as the world's largest economy recovers, Deutsche Bank said.
The Fed on March 18 cut the target rate for overnight lending between banks by 0.75 percentage point to 2.25 percent. Futures contracts on the Chicago Board of Trade show there's a 34 percent chance the Fed will trim it by a half-percentage point at its April 30 meeting, compared with a 28 percent likelihood yesterday. The remaining odds are for a quarter-point cut.
The Conference Board confidence index, due at 10 a.m. in New York, fell to 73.5 in March from 75 in February, according to a Bloomberg survey of economists. The S&P/Case-Shiller 20- city home-price index, due at 9 a.m., will fall 10.5 percent in January from a year earlier, a separate survey shows.
Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey showed today.
The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent decrease in December. The gauge has fallen for 13 consecutive months.
Last Updated: March 25, 2008 09:35 EDT
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