Monday, March 3, 2008

Dollar Falls to 3-Year Low on Speculation U.S. Rates to Decline

The dollar declined to a three-year low against the yen on speculation the Federal Reserve will signal plans to keep cutting interest rates to avert a recession.

The currency broke below 103 yen for the first time since January 2005 and approached a record low against the euro before speeches by two Fed policy makers and an industry report that may show U.S. manufacturing contracted. The dollar fell last week against the euro by the most since December after Fed Chairman Ben S. Bernanke said some small banks may fail and unemployment will increase.

The dollar fell to 102.93 yen, the lowest since Jan. 28, 2005, before trading at 103.10 at 11:35 a.m. in Tokyo, from 103.74 late in New York on Feb. 29. It declined to $1.5198 against the euro from $1.5179 in New York at the end of last week, when it fell to $1.5239, the lowest since the common European currency's introduction in January 1999. The euro traded at 156.68 yen from 157.46.

The U.S. currency may fall to $1.55 per euro in the next few weeks, Gibbs forecast.

The dollar weakened to a record low of 1.0323 Swiss francs from 1.0412 and declined to 5.2062 Norwegian kroner compared with 5.2131. Against the Canadian dollar, the U.S. currency dropped to C$0.9856 from C$0.9878.

Asian Currencies

Asian currencies fell against the dollar on speculation a U.S. economic slowdown will spread to the region. South Korea's won fell 0.6 percent to 944.95 per dollar, the biggest one-day decline in three months. The Singapore dollar declined 0.2 percent from late Asian trading on Feb. 29 to S$1.3958.

The U.S. currency tumbled 2.3 percent against the euro in February, its biggest monthly decline since September. The synthetic euro, which estimates the European currency's value before 1999, reached the strongest since at least January 1989, when Bloomberg's data on the measure begin, on Feb. 29.

Record Low

The dollar fell to a record low against the currencies of six major trading partners. Philadelphia Fed President Charles Plosser speaks on monetary policy in Arlington, Virginia at 8 a.m. local time today. Fed Governor Randall Kroszner will talk on risk management at 2 p.m. in Washington. Both vote on interest rates.

The U.S. Dollar Index traded on ICE Futures in New York fell to 73.531 today, the lowest since the gauge started in 1973. The Institute for Supply Management will say its manufacturing index fell to 48 in February from 50.7 the previous month, indicating a contraction, according to a Bloomberg News survey.

Futures traders increased their bets that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a decline -- so- called net longs -- was 31,778 on Feb. 26, compared with net longs of 14,730 a week earlier.

Subprime Loans

The yen gained against all 16 of the most-active currencies on speculation that losses linked to subprime mortgages will deepen, prompting investors to reduce holdings of higher- yielding assets financed from Japan.

The yen rose to a two-week high versus the euro after Japanese consumer finance firm Takefuji Corp. said today it may report losses of as much as 30 billion yen ($289 million) on subprime-related derivatives transactions.

The MSCI Asia-Pacific index of regional shares fell 2.9 percent after UBS AG, Europe's biggest bank by assets, predicted global financial companies may lose at least $600 billion from the collapse of the subprime market. Ambac Financial Group Inc., a bond insurer, also known as a monoline, said last week it will stop writing new guarantees on new asset-backed securities for six months to avoid a credit rating downgrade.

Risk Aversion

``Investors are shunning risky assets and are buying the yen non-stop,'' said Seiichiro Muta, director of foreign exchange in Tokyo at UBS, the world's second-largest currency trader. ``Everything is bad as the subprime and monoline crisis doesn't seem to be over and stocks may decline.''

Japan's currency may strengthen to 156.00 per euro and 102.00 against the dollar today, Muta forecast.

The yen gained 2.7 percent against the South African rand to 12.9114 and advanced 1.2 against the New Zealand dollar to 81.99.

Japan's benchmark rate of 0.5 percent, the lowest among industrialized nations, compares with 8.25 percent in New Zealand and 11 percent in South Africa. In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

The one-month 25-delta risk reversal rate for dollar-yen options widened to minus 3.2 percent from minus 2.95 percent at the end of last week. Delta measures the change in an option's value relative to currency moves. A negative risk reversal rate indicates greater demand for yen call options that grant the right to buy over put options that grant the right to sell.

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