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Dollar Falls to Record Low Against Euro, 12-Year Low Versus Yen

March 14 (Bloomberg) -- The dollar sank to the weakest ever against the euro and to a 12-year low versus the yen after JPMorgan Chase & Co. and the New York Federal Reserve agreed to provide emergency funding to Bear Stearns Cos., signaling credit market losses may widen.

The U.S. currency also plunged to below parity with the Swiss franc for the first time as traders speculated the Fed will slash interest rates a full percentage point next week to keep a credit-market crisis from triggering a recession.

``The initial reaction is to sell the U.S.: sell the dollar, sell the equities,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. ``This is bad news; it's definitely a confirmation of the reality that U.S. financial institutions are having a hard time.''

The U.S. currency plunged to $1.5688 per euro, the weakest since the European currency's debut in 1999. It then settled back to $1.5639 per euro at 10:29 a.m. in New York, from $1.5635 yesterday. The dollar sank to 99.57 yen, the weakest since October 1995, and then traded at 100.02 yen from 100.65 yesterday.

It reached as weak as 0.9988 francs per dollar, from 1.0093 francs yesterday.

The New York Fed will ``provide non-recourse, back-to- back'' financing for up to 28 days, JPMorgan said in a statement today. Bear Stearns Chief Executive Officer Alan Schwartz said today in a separate statement that the firm's ``liquidity position in the last 24 hours had significantly deteriorated.''

Exiting Carry Trades

The announcement on Bear Stearns led traders to exit so- called carry trades, in which they obtain cheap loans in yen and use the funds to buy higher-yielding assets elsewhere. U.S. stocks fell, with the Standard & Poor's 500 index dropping 1.7 percent.

The likelihood the Fed will cut its target rate for overnight loans between banks by 100 basis points to 2 percent next week rose to 36 percent, from zero percent yesterday, futures traded on the Chicago Board of Trade showed. The balance of bets is on a cut of 75 basis points to 2.25 percent. The central bank has already reduced rates five times since September, from 5.25 percent.

No Relief

``I don't see any relief for the dollar,'' said Win Thin, a currency strategist with Brown Brothers Harriman & Co. in New York. ``It's another brush fire for the Fed to put out. It's like you put a finger in the dike and another hole pops up.''

The yen and franc both advanced against more than a dozen major currencies, including about 1 percent against the Australian dollar. The gains came as demand evaporated for the carry trade, where traders borrow cheaply in countries such as Japan and Switzerland and invest in countries such as Australia, where the benchmark rate is 7.25 percent. Japan's main rate is 0.5 percent and Switzerland's is 2.75 percent.

Currency volatility has surged in recent weeks, increasing the risk of the carry-trade strategy. One-month volatility on dollar-yen options was about 16.5 percent, up from about 10.5 percent at the end of last month. Currency swings can erase profits from rate differentials.