Monday, March 3, 2008

Dollar Falls to Record Against Euro as Manufacturing Contracts

Dollar Falls to Record Against Euro as Manufacturing Contracts

By Bo Nielsen and Gavin Finch

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The dollar declined to a three-year low against the yen and a record versus the euro on speculation the U.S. economic slump will cause banks to report more losses from the collapse of the subprime-mortgage market.

The currency fell for a fifth straight day, dropping below 103 yen for the first time since January 2005, and touched the weakest since the euro's 1999 debut. Dollar declines also came as stocks fell after a report showed U.S. manufacturing contracted for a second time in three months.

``Negative prospects for global markets and the global economy further precipitated the sharp decline in the dollar'' against the yen, said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Bank of New York Mellon. ``We are seeing risk aversion across the board.''

The dollar tumbled to 102.62 yen, the lowest since Jan. 28, 2005, before trading at 103.08 at 10:04 a.m. in New York, from 103.74 on Feb. 29. It touched as weak as $1.5275 per euro, from $1.5179 on Feb. 29.

The yen gained versus all of the 16 most-traded currencies, rising the most versus the South African rand as credit-market losses prompted investors to reduce holdings of higher-yielding assets financed with loans from Japan, a strategy dubbed the carry trade. The yen advanced 1.3 percent to 13.0732 per rand.

`Free-Fall'

``The dollar is in a clear free-fall, down versus every major and emerging-market currency,'' Jan Loeys, head of global- market strategy at JPMorgan Chase & Co. in London, wrote in a note to clients.

Japanese consumer finance firm Takefuji Corp. said today it may report losses of as much as 30 billion yen ($289 million) on subprime-related derivatives transactions. The yen advanced to 156.87 per euro from 157.46.

``Risk aversion is clearly the dominant theme in the market and that's punishing the dollar,'' said Michael Klawitter, a currency analyst in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. ``We're in an environment of plummeting equities and soaring default protection costs.''

Asian currencies slumped against the dollar on speculation a U.S. slowdown will spread to the region. South Korea's won weakened 0.8 percent to 946.80 per dollar, the biggest one-day decline since November.

Break of 100 Yen

Japan's benchmark rate of 0.5 percent, the lowest among industrialized nations, compares with 8.25 percent in New Zealand and 11 percent in South Africa. In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

Options traders are paying the biggest premium in five weeks to bet on a stronger yen. The one-month risk reversal rate for dollar-yen options traded at minus 3.49 percent from minus 2.95 percent at the end of last week, reaching the most in favor of yen calls relative to puts since Jan. 24. A negative rate indicates greater demand for yen call options that grant the right to buy, over put options giving the right to sell.

``The rapid move lower in the dollar against the yen in particular is fueling speculation of a break in the key 100 level for the first time since 1995,'' Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note to clients. ``It is notable that rhetoric from Japanese officials has been non-existent.''

February Slump

The U.S. currency tumbled 2.3 percent against the euro in February, its biggest monthly decline since September. The synthetic euro, which estimates the European currency's value before 1999, rose to the strongest level since at least January 1989, when Bloomberg's data on the measure began.

Billionaire investor Warren Buffett's Berkshire Hathaway Inc. said on Feb. 29 it bet on dollar losses versus the Brazil real last year. Direct currency positions generated $2.3 billion of pretax profits over the past five years, the company said.

``Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S.,'' the Omaha, Nebraska-based company said in its annual report. ``And over time, that puts pressure on the dollar.''

Traders raised bets that the Federal Reserve will cut interest rates by 0.75 percentage point at its March 18 meeting. Fed fund futures contracts on the Chicago Board of Trade show 72 percent odds the Fed will lower the main rate to 2.25 percent from 3 percent. A week ago, traders saw no chance of such a deep cut this month.

Manufacturing Contracts

U.S. policy makers have lowered the target rate by 2.25 percentage points since September, while the European Central Bank has kept its benchmark at a six-year high of 4 percent as inflation accelerated. A report today showed inflation in Europe last month held at the highest level since the euro's debut.

The index measuring the dollar against the currencies of six major trading partners fell to a record low today. The U.S. Dollar Index traded on ICE Futures in New York slid to 73.39, the lowest since the gauge started in 1973.

The Institute for Supply Management said its manufacturing index declined to 48.3 in February from 50.7 in January, indicating a contraction. The median forecast in a Bloomberg survey was for a drop to 48.

The dollar dropped to a record low of 1.0309 Swiss francs today, before trading at 1.0385, from 1.0412 on Feb. 29.

The U.S. currency dropped versus Norway's krone, which some traders are buying as a refuge from mounting losses in the credit markets. Norway's currency is trading at its strongest level in a generation. The dollar decreased 0.8 percent to 5.1736 kroner.

The euro may extend its rally to as high as $1.57, based on charts that predict price movements, wrote Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.

The currency's gain against the dollar last week through so-called resistance between $1.4955 to $1.4965 and above the $1.50 ``psychological'' level sets up a ``target'' from $1.5620 to $1.57, Edgeley wrote in a research report dated yesterday.

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