Tuesday, August 7, 2007

Dollar Falls to Near Record Low Versus Euro on Growth Concerns

Aug. 6 (Bloomberg) -- The dollar fell to near a record low versus the euro on concern subprime mortgage losses will slow the economy and prompt the Federal Reserve to cut interest rates.

The dollar touched the lowest in more than four months versus the yen as traders raised bets the Fed will lower rates as soon as October after a U.S. report on Aug. 3. showed companies added fewer jobs last month than economists forecast. The yen rose versus the New Zealand dollar and pound as stocks declined in Asia and Europe, prompting investors to repay Japanese loans used to buy higher-yielding assets.

``With the potential for lower interest rates and growth in the U.S. economy, and the rising fear of subprime contagion, the market will continue to abandon the dollar,'' said Greg Salvaggio, vice president of capital markets at currency-trading company Tempus Consulting in Washington. ``Dollar weakness will continue to rule the market.''

The U.S. currency fell to $1.3801 per euro at 10:10 a.m. in New York, from $1.3773 on Aug. 3, earlier reaching $1.3839, near a record low of $1.3852 reached on July 24. The dollar declined to 117.85 yen, from 118.05, and touched 117.19, the weakest since March 29. Salvaggio said the dollar will fall to $1.44 per euro by year-end.

The New York Board of Trade's DXY dollar index fell below 80 for the first time since September 1992. The index reached 79.957 before reaching 80.179.

`More Downside'

``It's certainly a significant breakthrough and could be a precursor of more downside if the Fed signals a shift in policy tomorrow,'' said Boris Schlossberg, senior currency strategist in New York at DailyFX.com.

Federal funds futures show traders see a 72.4 percent chance the Fed will cut its 5.25 percent benchmark rate by October. The odds were 5.9 percent a month ago. The Labor Department said on Aug. 3 the economy added 92,000 jobs in July, compared with 126,000 in June and the 127,000 forecast in a Bloomberg survey.

The dollar has lost 1 percent in the last five days against the euro on speculation Fed policy makers will voice concern about slowing growth at their meeting tomorrow. The bank will leave borrowing costs unchanged at the meeting, according to a separate survey

The pace of leveraged buyouts has slowed more than 33 percent since June, data compiled by Bloomberg show. Investors are cutting back on riskier assets such as the loans and bonds that fund LBOs after being burned by losses from U.S. subprime mortgages.

Late Payments

American Home Mortgage Investment Corp. filed for bankruptcy today and became the second-biggest residential lender to seek court protection this year. The filing added to signs that late payments have spread to homeowners with good credit records.

``With the subprime woes intensifying, the Fed might make a reference to this in their statement,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``It's negative for the dollar.''

A 2.7 percent decline in the Standard & Poor's 500 Index on Aug. 3 spread to Asian and European markets, encouraging investors to pare so-called carry trades. The Morgan Stanley Capital International Asia Pacific Index of shares dropped 1 percent, and Europe's Dow Jones Stoxx 600 Index dropped 3.5 percent.

The Swiss franc, another popular funding currency for the carry trade, rose 0.4 percent to 1.1863 against the dollar. The yen has risen 5.1 percent against the dollar since Bear Stearns Cos. said on June 22 that two of its hedge funds that made bets on subprime loans collapsed.

`Slowing Growth'

``The prospect of slowing growth raised market speculation that it will give the Fed flexibility to ease,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``This points to a negative picture for the dollar. It is important to look at Swiss franc-dollar. If the Swiss can close below 1.18, it will help euro-dollar to break the record level.''

The implied volatility of one-month dollar-yen options touched 10.6 percent, the highest in more than a year.

Higher volatility may discourage carry trades as it exposes these bets to more currency risk. The yen has gained 2.9 percent against the dollar since one-month volatility started rising from 5.725 percent on June 5, the lowest since Bloomberg began compiling the data in 1995.

``We're seeing increased options demand on expectations the dollar will fall more against the yen,'' said Ryousei Ishida, senior vice president of foreign-exchange options at Mizuho Corporate Bank Ltd. in Tokyo.

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