Wednesday, March 12, 2008

Dollar Falls to Record Low on Concern Fed Package Won't Succeed

Dollar Falls to Record Low on Concern Fed Package Won't Succeed

By Ye Xie and Gavin Finch

Go To Original

The dollar fell to a record below $1.55 per euro as firms from Citigroup Inc. to Goldman Sachs Group Inc. said the Federal Reserve's plan to inject $200 billion into the banking system may fail to break the freeze in money-market lending.

The U.S. currency erased almost half of yesterday's 1.6 percent rally versus the yen, the biggest in six months, which came after the Fed said it would lend Treasuries to financial institutions in return for mortgage debt. Traders bet the Fed will cut rates by as much as three quarters of a percentage point next week to avert a recession, while the European Central Bank keeps borrowing costs unchanged.

``It's difficult for the dollar to gain traction,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets at Putnam Investments in Boston. ``The Fed is probably running out of options; the market is fixated on interest-rate differentials, which are clearly negative for the dollar.''

The dollar fell to $1.5504 per euro, the weakest since the euro's 1999 debut, and traded at $1.5484 at 11:19 a.m. in New York, from $1.5338 yesterday. The previous historic low was set yesterday. It dropped to 102.67 yen from 103.42, within 1.5 yen of an eight-year low. The euro rose to 158.95 yen from 158.61.

Euro gains were limited after Luxembourg Finance Minister Jean-Claude Juncker told reporters in Brussels he is ``very vigilant'' on exchange rates. The remark echoes comments from March 4, when the region's finance ministers said they were concerned the euro's rally risks hurting the economy.

Yen Versus Rand

The yen climbed against a dozen major currencies, including a 1.5 percent gain versus South Korea's won, as a government report showed Japan's economy grew an annualized 3.5 percent last quarter, faster than the 2.3 percent median forecast of economists surveyed by Bloomberg News.

The euro extended its climb against the dollar earlier after a European Union report showed industrial production in the region increased for the first time in three months in January. It rose 0.9 percent from the prior month, more than twice the rate forecast by economists surveyed by Bloomberg.

The euro also rose on speculation ECB President Jean-Claude TrichetAxel Weber yesterday said that he sees ``no room'' to lower rates. will highlight inflation risks today at a press conference. ECB council member

The ECB's main rate is 1 percentage point above the Fed's 3 percent target for overnight loans between banks. The euro interbank offered rate for three-month euro loans rose a seventh day, by 1 basis point to 4.61 percent, the highest since Jan. 7, the European Banking Federation said.

`Stay Short'

The dollar dropped to $2.0187 per U.K. pound from $2.0064, and to 1.0241 Swiss francs from 1.0335.

Policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed yesterday on a second round of emergency- loans to curb rising money-market rates, on top of the Fed loans.

``Read the need for such new measures as being a symptom of what ails the world and not a panacea for its problems,'' said David Simmonds, the London-based global head of currency research at Royal Bank of Scotland Plc, the world's fourth- biggest foreign-exchange trader. ``Stay short dollars.''

The collapse of the U.S. subprime mortgage market has caused losses and writedowns of $190 billion at the world's biggest financial institutions. Concerted action announced Dec. 12 temporarily eased the shortage of cash in money markets.

`Not a Panacea'

The Fed's measures are ``not a panacea, more like an aspirin for the dollar,'' analysts led by Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co., wrote in a research note today. ``There is a reasonable risk that this Fed move reflects the depth of their concern with U.S. asset markets, not a Fed formula to resolve U.S. asset- market difficulties.''

Goldman Sachs analysts said in a report that ``we are not convinced that yesterday's move will solve all the multiple challenges facing credit markets and the financial system.'' Citigroup said ``credit concerns are likely to persist and averting a drawn out recession is becoming increasingly challenging.''

The dollar will extend declines against most major currencies in the next six months as the U.S. economy slows, a survey of 5,430 Bloomberg users showed.

March 18 Bets

The Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, declined to 72.54. It set a record low of 72.462 on March 7.

Traders bet the Fed will cut its target rate as much as 0.75 percentage point on March 18 to keep the U.S. from falling into a recession. The likelihood of a reduction to 2.25 percent was 68 percent, according to futures on the Chicago Board of Trade. The balance of bets is on a cut to 2.5 percent.

``There has not yet been a U.S. dollar crisis,'' Henry Kaufman, president of Henry Kaufman & Co. in New York and the former chief economist at Salomon Brothers Inc., said in a Bloomberg Radio interview yesterday. ``Dollar weakness is critical only if it becomes disorderly, and so far in the price movements we haven't seen real gapping taking place.''

No comments: