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.

Monday, August 6, 2007


The euro appreciated vis-à-vis the U.S. dollar last week as the single currency tested offers around the $1.3790 level and was supported around the $1.3610 level. The pair gained about 150 pips last week. Evidence emerged that the U.S. credit shakeout from migrated to other asset classes such as corporate bonds and to other global markets. St. Louis Fed chief Poole said the Fed will “not ignore” market uncertainty and won’t contribute to it with the Fed’s policy. The FOMC is expected to keep rates unchanged on Tuesday and acknowledge the reassessment of risk in the credit markets.

The ECB kept the refinancing rate unchanged at 4.00% with Trichet twice pledging “strong vigilance.” Most traders see a +25bps hike next month by the ECB.

Data released in the U.S. last week saw the Q2 employment cost index was up +0.9% with benefit costs up 1.3%; June personal spending was up +0.1%; June personal incomes were up +0.4%; the core PCE price index was up +0.1% and +1.9% y/y; July consumer confidence improved to 112.6 from 105.3 in June; June construction spending was down 0.3%; July Chicago PMI fell to 53.4 from 60.2; June pending home sales were up 5.0%; the July ISM manufacturing index fell to 53.8 from 56.0 in June; July ADP payrolls were up 48,000; weekly initial jobless claims were 4,000 to 307,000; continuing jobless claims were off 16,000 to 2.53 million; June factory orders were up +0.6%; July non-farm payrolls were up 92,000 with a cumulative -8,000 downward revision for May and June; July unemployment ticked up to 4.6% from 4.5%; July average hourly earnings were up +0.3% m/m and +3.9% y/y; and the July ISM services index moved lower to 55.8.

Data released in the eurozone last week saw German June wholesale sales up +0.1% m/m and +0.2% y/y; the EMU-13 preliminary July HICP moderated to +1.8% from +1.9% in June; the EMU-13 July economic sentiment indicator fell to 111.0 from 111.7; the German July jobless rate at 3.715 million, up 28,000; June retail sales were up +0.7% m/m and off 0.8% y/y; the July PMI survey printed at 54.9, down from June’s 55.4 tally; EMU-13 June PPI was up +0.1% m/m and +2.3% y/y; and June retail sales were up +0.9% m/m and +0.4% y/y.

Technical Outlook

Last week’s high (1) was above the 23.6% retracement of the 1.3261-1.3851 range and last week’s low (2) was just below the 38.2% retracement of the same range. The 1.3840/ 1.3910/ 1.3970/ 1.4040/ 1.4125 levels represent upside resistance targets while the 1.3712/ 1.3626/ 1.3537/ 1.3420/ 1.3302/ 1.3273 levels represent downside support targets.