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Dollar sinks as fed cuts rates { August 2007 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=ae27HJKkvLmg&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=ae27HJKkvLmg&refer=home
Dollar Falls to All-Time Low Versus Euro on Fed Rate Outlook
By Min Zeng
Sept. 22 (Bloomberg) -- The dollar fell to a record low against the euro and touched the weakest since 1976 versus the Canadian dollar on speculation the Federal Reserve will keep cutting U.S. interest rates.
The dollar posted the biggest weekly losses versus the euro since March as the Fed's half-percentage-point interest-rate cut on Sept. 18 dimmed the allure of U.S. assets. The Fed's trade- weighted dollar index sank to its lowest in 36 years. The dollar may extend its loss next week on reports forecast to show declines in home sales, durable goods and consumer confidence.
``The Fed has untied the dollar and let it slip,'' said Dennis Gartman, an economist and editor of the Suffolk, Virginia-based Gartman Letter.
The U.S. currency fell 1.6 percent this week to $1.4091 per euro and touched $1.4120 yesterday, the lowest since the euro's inception in January 1999. The dollar has lost 6.3 percent this year against the euro. It will drop to $1.45 per euro within two months, according to Gartman.
The New York Board of Trade's dollar index comparing the U.S. currency against six primary peers including the euro and yen, touched 78.398 yesterday, the lowest since September 1992. The Fed's major currency trade-weighted dollar index dropped to 74.78 on Sept. 20, the weakest since its inception in 1971.
4.75 Percent
The New Zealand dollar led the advance among the 16 major currencies this week, gaining 4.4 percent versus the U.S. dollar. The Canadian dollar increased 2.9 percent against its U.S. counterpart, the most since November 1998, and rose above $1 for the first time since November 1976.
The Fed on Sept. 18 cut its benchmark rate a half-point to 4.75 percent, the first reduction since 2003, as the biggest housing slump in 16 years threatens to weaken the world's largest economy. The European Central Bank's rate is 4 percent.
``Dollar weakness will drag on,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. ``The crisis is not over and the Fed is likely to cut rates further.''
An index of U.S. consumer confidence probably fell to 104 this month from 105 in August, while new home sales slowed to an annualized rate of 830,000 in August, from 870,000 in July, according to the median forecast in Bloomberg News surveys.
Rate Bets
Durable goods orders last month may have declined 3.4 percent following a 5.9 percent gain in July, according to the median forecast in a separate Bloomberg News poll.
Futures contracts show traders see a 72 percent chance of a quarter-percentage point cut to 4.5 percent at the Fed's next meeting on Oct. 31, up from 26 percent a week earlier.
The yen declined against all 16 most-active currencies this week as a decline in corporate borrowing costs and an advance in stocks encouraged investors to buy higher-yielding assets funded by loans in Japan, a practice known as the carry trade.
``The funding market is unfreezing and borrowing costs are coming down,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It helps spur risk appetite and gives a boost to the carry trade.''
The London interbank offered rate, which banks charge each other for overnight loans in dollars, dropped 4 basis points to 4.90 percent yesterday, according to the British Bankers' Association. A basis point is 0.01 percentage point.
Speculative borrowers sold $1.83 billion of debt this week, the most since July, according to data compiled by Bloomberg. The Standard & Poor's 500 Index rose 2.9 percent this week, for a second straight week of gains.
The yen fell 1.6 percent this week to 162.64 per euro and 0.1 percent to 115.50 per dollar.
Japan's 0.5 percent benchmark borrowing rate, the lowest among industrialized nations, compares with 4 percent in the euro region, 6.5 percent in Australia and 8.25 percent in New Zealand.
In the carry trade, investors borrow in a country with low interest rates and invest where rates are higher, earning the difference. The risk is that currency moves may erase profits.
Last Updated: September 22, 2007 09:09 EDT
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