Dollar Falls Below 108 Yen on Outlook for More Fed Rate Cuts
Bloomberg | November 23, 2007
By Ron Harui and David McIntyre
The dollar dropped below 108 yen for the first time since 2005 and fell to a record low against the euro on speculation U.S. credit-market losses will prompt the Federal Reserve to lower interest rates.
The currency headed for its biggest weekly decline versus the euro in two months after banks including Merrill Lynch & Co. and Citigroup Inc. said the Fed will cut its benchmark rate by at least 1 percentage point. The yen has risen 2.8 percent against the dollar this week as concern global economic growth will slow prompted investors to reduce carry trades, in which they bought higher-yielding assets with loans from Japan.
``Dollar weakness is going to continue,'' said Stephen Halmarick, co-head of economic and market analysis in Sydney at Citigroup Australia, a unit of the largest U.S. bank by assets. ``The U.S. economy is going to underperform and the Fed is going to be easing.''
The dollar fell to 107.55 yen, the lowest since June 10, 2005, before trading at 108.02 yen at 8:57 a.m. in London from 108.44 yen in New York yesterday. It dropped to $1.4967 per euro, the weakest since the single European currency's debut in 1999, before trading at $1.4864 from $1.4849. It will fall to $1.57 per euro by the end of the first quarter, Halmarick said.
The U.S. currency declined 0.2 percent to 7.4036 against China's yuan, fell as much as 1.1 percent to a record low of 1.0890 against the Swiss franc and dropped 0.2 percent to 2.0662 versus the British pound. Trading volumes may be below average because of Japan's Labor Thanksgiving public holiday.
Rate Outlook
The euro has gained 12.7 percent against the dollar this year, prompting European Central Bank President Jean-Claude Trichet to say yesterday in Paris he opposes ``brutal moves'' in currencies. U.S. Treasury Secretary Henry Paulson last week reiterated he favors a ``strong dollar.''
Citigroup predicted on Nov. 21 that the Fed will reduce the target for the overnight lending rate between banks to 3.5 percent from 4.50 percent by March 31. Merrill Lynch, the third- largest U.S. securities firm, sees the rate at 2 percent by June 30, 2009, David Rosenberg, New York-based chief North America economist wrote in a report dated Nov. 19.
The odds of the Fed cutting rates to 4.25 percent on Dec. 11 were 90 percent, up from 66 percent a month ago, futures contracts traded on the Chicago Board of Trade showed. The Organization for Economic Cooperation and Development yesterday estimated losses from U.S. subprime mortgage foreclosures could reach as much as $300 billion.
Options Barriers
The dollar's losses accelerated as traders pushed the currency below $1.4900 to cause options to become worthless, said Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore. So-called barrier options stipulate a level that renders it worthless should it be triggered. Options give holders the right to buy or sell a currency at a set price on a fixed date. An investor who buys an option can only lose the premium paid.
The dollar also dropped to an all-time low against the synthetic euro, a theoretical value that estimates where the currency would have traded before its inception.
The pace of the dollar's drop has surprised economists and businesses. The median forecast of 41 analysts and strategists was for the currency to trade at $1.45 to the euro by year-end, according to a Bloomberg News survey.
Airbus SAS's Chief Executive Officer Tom Enders yesterday told workers that the dollar had ``passed the pain barrier'' and was ``life-threatening,'' the Financial Times reported today. The European Commission this month cut its forecast for euro- area economic growth next year to 2.2 percent from 2.5 percent.
`Pain Threshold'
``It means that for some of the big European corporates such as Airbus that there's a pain threshold,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. The ECB may ``need to signal that anything above $1.50 they will take some steps.''
The euro traded at 160.52 yen from 161.07 yen, and was at 0.7195 against the pound from 0.7201. It may move between $1.4750 and $1.5000 next week, Morriss said. Trichet speaks today in Frankfurt.
Signs Europe and Japan may be able to withstand a U.S. economic slowdown have helped to support the euro and the yen.
Moody's Investors Service said today French banks have a ``manageable'' risk tied to subprime mortgages and no changes in ratings are warranted at this time. Japan's chief financial regulator said yesterday domestic banks had 1.3 trillion yen ($12 billion) in investments related to the U.S. subprime mortgage market as of Sept. 30.
Gains in the yen quickened after China's yuan strengthened beyond 7.4 to the dollar for the first time since a link to the U.S. currency was scrapped in 2005 before the ECB's Trichet arrives in Beijing next week to press for faster appreciation.
Carry Trades
The yen advanced this week against all of the world's 16 most-actively traded currencies as an index of Asian stocks headed for a third weekly loss, spurring a reduction in so- called carry trades. The MSCI Asia-Pacific Index of regional shares excluding Japan was set for a 4.8 percent decline this week, the most in three months.
``As risk appetite deteriorates the yen will be supported,'' said John Kyriakopoulos, a Sydney-based currency strategist at National Australia Bank Ltd., the nation's largest lender. ``As fears of a U.S. recession grow, so will the fears of a sharp global slowdown.''
Japan's currency gained the most this week against the Australian dollar, a favorite of the carry trade, rising 5.5 percent to 94.03. It climbed 4.8 percent versus Brazil's real to 60.7384 and advanced 4.4 percent against South Korea's won to 8.61893.
In carry trades, investors sell currencies in countries with low borrowing costs and buy higher-yielding assets elsewhere, profiting from the difference. Brazil's benchmark rate is 11.25 percent, compared with 0.5 percent in Japan. The risk is exchange-rate fluctuations erase those profits.
