Tuesday, July 29, 2008

Dollar Falls Against Euro, Yen on Credit Losses, Oil Increase

Dollar Falls Against Euro, Yen on Credit Losses, Oil Increase

July 28 (Bloomberg) -- The dollar declined from near a three-week high against the euro and the strongest in a month versus the yen on concern U.S. financial losses will widen and as crude-oil prices increased.

The currency dropped for a second day against the euro after Federal Reserve Bank of Minneapolis President Gary Stern told the Financial Times the U.S. credit crunch will get worse. The pound fell against all of the other major currencies as U.K. house values dropped in July the most in at least seven years.

``The financial sector is far from being healthy,'' said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. ``The Fed won't be able to raise rates any time soon given what's happening in the credit market. It's very difficult for the dollar to have a sustained rally.''

The dollar fell 0.3 percent to $1.5758 per euro at 8:41 a.m. in New York, from $1.5709 on July 25. It touched $1.5629 on July 24, the strongest since July 7. The dollar will trade in a range of $1.5650 to $1.5950 in the next few weeks, Serebriakov said. The U.S. currency dropped 0.2 percent to 107.61 yen, from 107.84, after earlier reaching 108.07, the highest since June 26. The euro traded at 169.55 yen, compared with 169.40. It touched the all-time high of 169.96 on July 23.

The pound decreased 0.2 percent to $1.9868 after Hometrack Ltd., a London-based research company, said U.K. house values dropped in July 4.4 percent from a year earlier. That's the biggest annual drop since the index started in 2001. Sterling weakened 0.5 percent to 79.24 pence per euro.

Chinese Yuan

The Chinese yuan fell 0.2 percent to 6.8345 per dollar after the Communist Party's Politburo said on July 25 that growth and inflation are both priorities, fueling speculation that the government will curb currency appreciation to aid exporters. The yuan has strengthened 7 percent this year, the most among Asia's 10 most-traded currencies outside Japan.

The Australian dollar traded at 95.63 U.S. cents after touching 95.28 cents, the lowest in almost three months. Australia & New Zealand Banking Group Ltd., the nation's fourth- biggest bank by market value, joined National Australia Bank Ltd., the largest in terms of assets, in warning of increased provisions for non-performing loans.

Six months after correctly identifying Australia's dollar as one of the best bets in the foreign-exchange market, Daiwa Asset Management Co., the biggest investor in the nation's debt, predicts that the rally is coming to an end. Daiwa, which holds 4 percent of the government's bonds, expects the currency to close the year at $1.

Price Index

The credit crunch is likely to last for months and may deteriorate further, Stern said in an interview with the Financial Times. Financial firms have reported $467.9 billion in losses and writedowns since the start of 2007.

U.S. home prices in the S&P/Case-Shiller index fell 16 percent in May from a year ago, the most on record, according to the median forecast of 21 economists surveyed by Bloomberg News. The report is due tomorrow. Nonfarm payrolls fell by 75,000 in July, following a decline of 62,000 in June, according to a separate survey. The Labor Department will release the employment data on Aug. 1.

``Data on housing and payrolls pose downside risks to the dollar,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Given the state of the housing market, you can't be overly optimistic on the U.S. economy. That makes it almost impossible for the Fed to raise rates.'' The dollar may fall to 106 yen this week, he said.

Fed Rate Outlook

Futures on the Chicago Board of Trade show a 93 percent chance the Fed will keep borrowing costs on hold at 2 percent when it announces its next decision on Aug. 5, up from 64 percent odds a month ago.

Consumer confidence in Germany dropped to the lowest in more than five years as soaring energy prices sapped purchasing power. GfK AG's index for August, based on a survey of about 2,000 people, declined to 2.1, the lowest since June 2003, from a revised 3.6 in July, the Nuremberg-based market-research company said in a statement today.

``The European economy is facing a major setback,'' wrote Tomoko Fujii, head of Japan economics and strategy at Bank of America in Tokyo, in a research note today. ``The markets cannot price in an ECB rate hike anymore. We are recommending euro- selling against the dollar.'' The 15-nation currency may fall to $1.54 against the dollar by the end of September, she said.

Crude oil for September delivery gained as much as $1.96 to $125.22 a barrel in electronic trading on the New York Mercantile Exchange. Oil has tumbled about $23 a barrel from the record $147.27 a reached on July 11.

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