Wednesday, September 12, 2007


Sept. 11 (Bloomberg) -- The dollar weakened to near a record low against the euro after Federal Reserve officials signaled the need for interest-rate cuts, eroding demand for dollar- denominated assets.

The U.S. dollar index sank to a 15-year low against six major currencies as Fed Governor Frederic Mishkin and Fed Bank of San Francisco President Janet Yellen said yesterday credit-market losses may slow growth, while a government report last week showed the economy unexpectedly lost jobs in August. The euro rose for a fifth day versus the dollar, its longest winning streak since June.

``Everyone hates the dollar,'' said Steven Butler, director of foreign exchange trading at Scotia Capital Inc. in Toronto. ``The market has a rate cut next week totally priced in. Lots of people are calling for the Fed to do more. The Fed seems to be backed into a corner.''

The dollar fell 0.2 percent to $1.3825 per euro at 10:26 a.m. in New York, after earlier touching $1.3839, the weakest since Aug. 6. The dollar reached a record low of $1.3852 on July 24. The U.S. currency bought 114.01 yen, from 113.71.

Brazil's real led gains among the 16 major currencies against the U.S. dollar, rising 1 percent. Canada's dollar and Sweden's krona increased 0.7 percent and 0.5 percent, respectively.

The New York Board of Trade's dollar index comparing the U.S. currency against its six primary peers, including the euro and yen, fell 0.2 percent to 79.671 from 79.816 yesterday. It earlier touched 79.616, the lowest since September 1992.

`No Reason'

``There is no reason to buy the dollar,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The dollar is pressured by speculation that the Fed is going to cut rates next week. Fed officials have signaled they are worried about downside risks to growth.''

The dollar will drop to $1.40 per euro by October, said Malpede.

The yen fell against all 16 major currencies as a rise in global stocks prompted investors to buy higher-yielding assets funded by loans in Japan.

The Standard & Poor's 500 Index rose 0.6 percent to 1,460.07 after gains in Asian and European equities. Treasuries fell for the first time in three days as demand for the safety of government debt waned.

The spread, or extra yield, investors demand to own emerging-market bonds instead of U.S. Treasuries narrowed 5 basis points, or 0.05 percentage point, to 2.41 percentage points, according to JPMorgan Chase & Co.'s EMBI Plus index. The drop in the risk premium is the biggest since Aug. 31.

The European Central Bank said it drained a record 60 billion euros ($83 billion) from the money market after the overnight deposit rate slumped below the bank's benchmark lending rate of 4 percent.

`Slight Return'

``You are seeing a slight return of risk appetite,'' said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon, the world's largest custodian bank with over $20 trillion in assets under administration. ``The market now prices in a Fed rate cut next week and there is hope that the credit problems will ease and liquidity will improve. Some of the risk-taking investors are positioning for the eventuality.''

The Japanese currency fell 0.3 percent to 157.51 per euro. The yen dropped 1 percent against the real, 0.9 percent versus the Canadian dollar and 0.4 percent versus the Australian dollar.

`Important Downside Risk'

Mishkin said yesterday there's an ``important downside risk'' to the world's biggest economy and Yellen highlighted ``significant downward pressure.''

Two-year Treasuries yielded 2 basis points less than similar-maturity German bunds amid speculation the Fed will cut its main rate at the Sept. 18 meeting. The U.S. notes lost their yield advantage for the first time in three years last week.

Interest-rate futures show a 56 percent chance the Fed will lower borrowing costs by half a percentage point to 4.75 percent next week. A month ago, traders were expecting a quarter-point cut.

Traders are betting the European Central Bank will raise borrowing costs at least once from 4 percent by year-end.

The implied yield on the December futures contract rose 4 basis points to 4.51 percent. The contract settles to the three- month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's key rate since 1999.

ECB executive board member Juergen Stark said the decision to leave the benchmark lending rate unchanged last week doesn't mean policy makers have ruled out another increase, Market News International reported.

Fed Chairman Ben S. Bernanke will deliver a speech at 11 a.m. New York time in Berlin today focused on trade and capital flows. He is scheduled to speak from a prepared text without taking questions.

A government report showed the U.S trade deficit narrowed during July.

The trade gap fell to $59.2 billion from a revised $59.4 billion in June. The median forecast of 70 economists surveyed by Bloomberg News was for a deficit of $59 billion.

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