DOLLAR NEWS

Dollar Falls Versus Euro on Concern Financial Losses to Deepen

July 10 (Bloomberg) -- The dollar fell against the euro on concern losses at financial firms will deepen, prolonging the U.S. economic slowdown.

Treasury Secretary Henry Paulson said in prepared congressional testimony that he's been assured by the regulator for Fannie Mae and Freddie Mac that the two companies have enough capital. The pound dropped versus the dollar and the euro as the Bank of England left its benchmark lending rate unchanged, increasing the risk of a recession.

``The heightened state of uncertainty is putting the dollar on the defensive,'' said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The overhanging concern about the financial sector is dogging the market here.''

The dollar dropped 0.3 percent to $1.5782 per euro at 10:28 a.m. in New York, from $1.5743 yesterday. The U.S. currency traded at 106.84 yen, compared with 106.76. The euro appreciated 0.3 percent to 168.60 yen, from 168.06.

South Korea's won gained for a fourth day on speculation the government is intervening to halt the currency's decline to curb inflation. The Finance Ministry reiterated today that the government will tackle risks stemming from higher oil costs. The won rose 0.2 percent to 1,002.97 per dollar.

The British pound decreased 0.5 percent to $1.9726 after the central bank kept its benchmark interest rate at 5 percent. Against the euro, sterling dropped 0.4 percent to 79.71 pence.

Weakened Dollar

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in its target lending rate to avert a recession. Futures contracts on the Chicago Board of Trade show 86 percent odds that policy makers will keep borrowing costs unchanged next month.

Fannie and Freddie tumbled to the lowest level in 17 years in New York trading after former St. Louis Fed President William Poole said in an interview today that chances are increasing that the U.S. may need to bail out the companies.

The dollar fell against the euro yesterday after Fannie, the biggest provider of financing for U.S. home loans, paid a record yield relative to Treasuries on the sale of $3 billion in notes.

``There's a mixture of risk, which seems to be based in the U.S. in the special areas of finance, Fannie Mae and Freddie Mac,'' said Peter Frank, a currency strategist in London at Societe Generale SA, France's second-biggest bank by market value. ``We may see the dollar weakening again against a broad cluster of currencies.''

French Output

The euro weakened against the dollar earlier after reports showed French and Italian industrial production dropped in May more than economists forecast, raising concern European economic growth is slowing.

Output at French factories and utilities fell 2.6 percent from the previous month, the biggest decline since October 2005 the Paris-based statistics office said today. Italian production declined 1.4 percent from April, almost three times the drop forecast by economists in a Bloomberg News survey.

The euro may rise to $1.5909 against the dollar should it stay above its five-day moving average, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The average, currently $1.5715, will provide a level of so- called support for the euro, Tokyo-based Hashimoto said, citing technical charts traders use to predict price movements. The firm's target matches a two-month high set by the 15-nation currency on July 3. Support is an area at which buy orders may be clustered.

The Norwegian krone declined as much as 0.4 percent to 8.0833 per euro after a government report showed inflation accelerated in June less than economists forecast.

Dollar News

Dollar May Extend Gain on Bernanke's Comment, Crude Oil Decline

By Ye Xie and Candice Zachariahs

July 9 (Bloomberg) -- The dollar may rise against the euro for a second day after Federal Reserve Chairman Ben S. Bernanke said the central bank may extend its emergency-loan program for securities firms into next year and crude oil prices tumbled.

The U.S. currency advanced yesterday, erasing losses that came at the start of the week on concern Fannie Mae and Freddie Mac, the two largest mortgage finance companies, may need to raise additional capital.

``Bernanke is telling the market that the Fed will be there if there's any problem,'' said Joe Trevisani, chief market analyst in Saddle River, New Jersey, at FX Solutions LLC, a foreign-exchange brokerage. ``The Fed has calmed down the markets. If oil continues to come down, the dollar may strengthen further.''

Against the euro, the U.S. currency traded at $1.5665 at 6:37 a.m. in Tokyo, after rising 0.4 percent yesterday. The dollar traded at 107.43 yen, following a 0.3 percent increase. Japan's currency was at 168.30 per euro, after a 0.1 percent gain.

The dollar strengthened yesterday as Bernanke said in a speech in Arlington, Virginia, that the Fed is committed to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers'' beyond year-end.

``Markets are going through another bout of turbulence, and they're willing to act to counter those forces,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, on Fed policy makers. ``That's where the support for the dollar is coming from.'' The firm is the world's largest custodial bank, with about $23 trillion in assets under administration.

Dollar's Decline

The Fed's Primary Dealer Credit Facility, which provides direct loans, and the Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, were created in March in response to the credit crisis. Both programs are aimed at the 20 primary dealers in U.S. government debt.

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in the target lending rate, now 2 percent, to prevent the housing slump and credit losses from plunging the U.S. economy into a recession. The European Central Bank raised its main refinancing rate last week to a seven-year high of 4.25 percent.

Richmond Fed President Jeffrey Lacker told reporters in Washington yesterday that the weak dollar may fuel ``inflation pressures,'' echoing Bernanke's comments last month that policy makers are ``attentive'' to the effect of the dollar's decline. Lacker said in a speech yesterday that the central bank should consider raising interest rates to limit inflation as the threat of a steep economic slump begins to fade.

Crude Oil

Bernanke and U.S. Treasury Secretary Henry Paulson are scheduled to testify before Congress tomorrow.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, yesterday increased as much as 0.6 percent to 73.082, the highest level since June 24.

Crude oil for August delivery fell for a second day, dropping more than 3 percent to $135.90 yesterday. It reached a record high of $145.85 a barrel on July 3. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

China's yuan appreciated 0.2 percent to 6.8511 per dollar, near the strongest since a dollar link ended in July 2005, on speculation the government will allow faster gains in the currency to help curb inflation.

The U.S. currency fell 0.1 percent against the euro on July 7 as a report from Lehman Brothers Holdings Inc. said Fannie and Freddie may need to raise a total of $75 billion because of an accounting change. They have enough capital to survive the housing slump and meet new accounting rules, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, told Bloomberg Television yesterday.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.

Last Updated: July 8, 2008 17:42 EDT

Dollar Rises to One-Week High as Group of Eight Leaders Convene

Dollar Rises to One-Week High as Group of Eight Leaders Convene

July 7 (Bloomberg) -- The dollar rose to the highest level against the euro in more than a week as leaders of the Group of Eight nations convened in Japan.

The 15-nation euro and the pound dropped against the dollar as German and British industrial production fell in May. The yen weakened against the euro and the dollar as global stocks advanced, reviving demand for higher-yielding assets funded by loans in Japan. President George W. Bush, in Japan for the summit, reiterated support yesterday for a ``strong'' dollar.

``With the G-8 meeting in the background, the near-term sentiment of the dollar is improving,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``They prefer a strong dollar.''

The dollar increased 0.5 percent to $1.5624 per euro at 9:52 a.m. in New York, from $1.5706 on July 4. It touched $1.5611, the strongest level since June 25. The yen dropped 0.8 percent to 107.70 per U.S. dollar, from 106.80. Japan's currency fell 0.3 percent to 168.29 versus the euro, from 167.73.

South Korea's won rose against all of its major counterparts after the government pledged ``stern action'' to stabilize the local currency. The won climbed 0.7 percent to 1,042.90 per dollar, from 1,050.35 on July 4.

The dollar strengthened versus the euro on speculation U.S. officials will say the currency has fallen too far and try to stem gains in oil prices as the G-8 summit gets under way in Japan. Leaders from Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S. are meeting for three days.

Bush on Dollar

Bush said yesterday on the first day of his five-day trip to Japan that the U.S. will continue to pursue a strong dollar.

``The U.S. believes in a strong-dollar policy,'' he said at a news conference with Japanese Prime Minister Yasuo Fukuda in Tokyo. The U.S. economy remains fundamentally strong even as growth has slowed, Bush said.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, rose as much as 0.6 percent to 73.151, the highest level since June 24.

The U.S. currency also appreciated as crude oil fell after Iran's Foreign Minister Manouchehr Mottaki expressed confidence in talks with Western governments on the country's nuclear program. Organization of Petroleum Exporting Countries President Chakib Khelil said yesterday record oil prices are more related to the dollar exchange rate than supply.

Crude Oil Falls

Crude oil for August delivery fell 1.6 percent to $143.02 a barrel on the New York Mercantile Exchange. Oil reached a record $145.85 a barrel on July 3.

The euro fell against the dollar as German industrial production unexpectedly dropped 2.4 percent in May, its third straight decline, prompting traders to pare bets the European Central Bank will raise the main refinancing rate for a second time this year.

``We do see the euro weaker,'' said Stuart Bennett, a senior European strategist at Calyon, the investment-banking unit of Credit Agricole SA, France's second-biggest lender. ``We are not relaxed about the growth outlook, and it's weaker than the ECB is accepting. Even though we suspect inflation means that they might have to hike again, the growth dynamics for Europe are pointing toward a weaker euro.''

The euro will fall to a range of $1.43 to $1.45 by the end of the year, Bennett predicted.

Trichet's `No Bias'

The 15-nation currency declined last week after ECB President Jean-Claude Trichet said he had ``no bias'' on borrowing costs following the decision to raise the main refinancing rate by a quarter-percentage point to 4.25 percent.

The British pound weakened to the lowest level against the dollar in almost two weeks after U.K. factory output fell 0.5 percent in May. The median forecast of analysts surveyed by Bloomberg News was for no change.

JPMorgan Chase & Co., the third-largest U.S. bank, predicted the Bank of England will keep the target lending rate at 5 percent ``for the time being,'' a change from its previous estimate for higher rates in August.

The pound slid as much as 0.9 percent to $1.9649 against the dollar, the lowest since June 24, from $1.9823 on July 4.

Japan's currency dropped 1.1 percent to 13.97 versus the South African rand and 1 percent to 10.44 against the Mexican peso as a rally in stocks encouraged investors to add to holdings of higher-yielding assets funded in Japan.

The MSCI Asia-Pacific Index gained 0.4 percent, while Europe's Dow Jones Stoxx 600 Index strengthened 1.7 percent. The Standard & Poor's 500 Index climbed 0.9 percent.

In the carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 12 percent in South Africa and 7.75 percent in Mexico.