Dollar Slumps to Record LowWed Jul 18, 2007 00:01
Dollar Slumps to Record Low Versus Euro on Bear Stearns Losses
By David McIntyre and Stanley White
A U.S. one dollar bill.
July 18 (Bloomberg) -- The dollar fell to a record low against the euro and dropped versus the yen after Bear Stearns Cos. reported hedge fund losses, fueling speculation investors will spurn U.S. assets as the economy slows.
The yen also rose against the euro, British pound and New Zealand dollar as investors scaled back carry trades, where they buy higher-yielding securities with money borrowed in Japan. Federal Reserve Chairman Ben S. Bernanke may be asked about financial industry losses caused by mortgage defaults when he testifies before Congress today.
``The subprime woes may weigh on the broader U.S. economy,'' said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. ``There's a bias for selling the dollar.''
The dollar declined to an all-time low of $1.3824 against the euro at 12:58 p.m. in Tokyo from $1.3781 in New York yesterday. It dropped to 121.77 yen from 122.34. The yen rose to 168.35 per euro from 168.59. The U.S. currency may decline to $1.3830 per euro and 121.50 yen today, Saito said.
The dollar reached a 26-year low of $2.0525 against the pound. It weakened to 87.83 cents against the Australian dollar, the lowest since February 1989. The dollar has fallen against 13 of the 16 most-active currencies today after Bear Stearns yesterday told investors in one of its hedge funds that they won't get any money back.
Interest-rate futures today showed 30 percent odds the Fed will lower borrowing costs from 5.25 percent in December, up from a 21 percent chance yesterday. Bernanke will deliver his semi- annual testimony on the U.S. economy to the House at 10 a.m. He will also speak in the Senate tomorrow at 9:30 a.m.
House Financial Services Committee Chairman Barney Frank threatened last month to strip the Fed of its regulatory authority if it doesn't do more to protect borrowers.
``Bernanke is going to be grilled on this issue and the broader repercussions,'' said Jason Evans, head of U.S. government bond trading at Deutsche Securities Inc. in New York. ``How he handles that question will determine how rates are going to move.''
The Federal Reserve's trade-weighted dollar index this week fell to the lowest since its inception in 1971. The U.S. Trade Weighted Major Currency Index measuring its performance versus seven currencies fell to a record low of 77.24 on July 16 and was at 77.29 yesterday, down 1.8 percent for the year.
The central bank's broad dollar index, which includes 26 currencies, dropped to the lowest since July 1997, while the New York Board of Trade's dollar index declined to a 12-year low.
``Breaking through those levels marks a new stage of the week dollar trend,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``The dollar's depreciation may accelerate.''
The yen recovered from a 21-year low against the New Zealand dollar to trade at 96.52 from 96.63. It rebounded from a 15-year trough against the pound to 250.03 from 250.40 late yesterday, as traders cut down riskier investments in higher-yielding assets with borrowed yen.
Investors have favored New Zealand and the U.K. for carry trades because the two countries have interest rates as much as 7.5 percentage points higher than Japan's.
``The yen is rising on an unwinding in carry trades,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Bear Stearns latest woes are sparking risk aversion. This isn't just about Bear Stearns. Other hedge funds may be suffering just as much.''
The yen may rise to 121.70 per dollar today, Soma said.
Wait Until September
Any gains in the yen may be limited by speculation the Bank of Japan will delay raising interest rates while it gauges the impact of subprime loan defaults. The U.S. is Japan's largest export market.
Some BOJ board members said it's necessary to watch the U.S. housing market, according to minutes released today from a meeting held June 14-15. Some policy makers also said lower oil prices are placing ``stronger downward pressure'' on consumer prices, the minutes showed.
The central bank's nine board members voted unanimously at that meeting to leave interest rates at 0.5 percent. The BOJ decided 8-1 to keep policy on hold at a meeting July 12.
``The market has priced in a rate increase in August, but the BOJ may not move until September,'' said Kengo Suzuki, a currency strategist at Shinko Securities Co. in Tokyo. ``The minutes show more uncertainty about the U.S. economy and Japanese inflation. The yen could be sold'' to 124 against the dollar and 174 per euro by year-end, he said.
To contact the reporter on this story: David McIntyre in Sydney at firstname.lastname@example.org ; Stanley White in Tokyo at email@example.com
Last Updated: July 18, 2007 00:01 EDT
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