0983112209

Dollar's Weekly Loss Sends Currency to 19-Month Low Versus Euro

Thu 0983112209

By Daniel Kruger
Nov. 25 (Bloomberg) -- The dollar dropped to a 19-month low this week versus the euro and fell against the yen on speculation slowing U.S. growth will lead the Federal Reserve to cut interest rates as the European Central Bank boosts them.
Traders raised bets the Fed will reduce borrowing costs as advisers to President George W. Bush on Nov. 21 cut forecasts for growth next year on a weaker housing market. Gross domestic product will rise 2.9 percent next year, slower than the 3.6 percent forecast in June, the Council of Economic Advisers said.
``Everybody knows the ECB wants to hike rates and will do so in December and the first quarter as well,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``We're looking for the dollar to sell off the rest of the year.''
The dollar weakened 2 percent to $1.3094 per euro from $1.2829 on Nov. 17. The U.S. currency dropped as low as $1.3109 yesterday. The dollar fell 1.6 percent to 115.90 yen from 117.75 a week ago. The euro also touched 151.76 yen yesterday, an all- time high, before closing at 151.71 from 151.05 a week ago.
The U.S. currency may reach $1.33 per euro by year-end, Reid said.
``You've got real money that is leaving the dollar,'' such as corporations hedging currency risk and central banks making multi-year allocations, said Firas Askari, head currency trader at BMO Nesbitt Burns in Toronto. ``That's money that doesn't get injected back into the economy. These guys sit on reserves for years at a time.''
The U.S. currency's move through $1.30 per euro, which it had approached several times this year without breaching, may indicate a period of prolonged weakness, according to some dollar bears.
ECB Determined
``The extent of this rise in the euro will be completely determined by the ECB,'' said Matthew Lifson, chief currency trader at PNC Capital Markets in Pittsburgh. ``People ask me, `Can you get to $2 on the pound?' Why not?''
The dollar fell to as low as $1.9351 per pound yesterday, its weakest against the British currency since Dec. 31, 2004. It last traded above $2 in 1992.
The current account deficit in the U.S. may also weigh on the dollar, said Tim Mazanec, senior foreign-exchange strategist at Boston-based Investors Bank & Trust Co.
``The lack of a stimulus to attract investors to the U.S. has the dollar on the defensive,'' Mazanec said. ``The current account deficit is front and center, the number one problem with the dollar.''
The U.S. current account showed a $218.4 billion deficit in the second quarter, near the record $223.1 billion for the fourth quarter of 2005.
Stop Losses
The dollar's drop was assisted by trading volume below the $1.9 trillion daily average because of holidays in the U.S. and Japan and preset orders to sell the currency at certain levels, traders said.
``It was easier to push through'' $1.30 per euro in an illiquid market, BMO's Askari said. ``You had a battle in the ranges. The weaker side was the dollar side.''
Traders place automatic orders, or so-called stop-losses, at preset levels to sell the currency after it breaches certain key levels, such as $1.30. Before this week the euro had been stuck between $1.2458 and $1.2938 during the second half of this year.
Yesterday's decline in the dollar ``was very much driven by some important technical levels,'' said Matthew Strauss, senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank by assets. ``Some stop-losses were triggered and forced it above the psychological level of $1.30.''
Reduce Borrowing Costs
Traders are betting the Fed will cut borrowing costs in 2007. In contrast, interest-rate futures show investors expect the Frankfurt-based ECB to raise its main interest rate twice more by June 2007.
ECB policy maker Klaus Liebscher told Reuters yesterday that the central bank must remain ``vigilant'' on inflation.
Europe's central bank has lifted borrowing costs five times since December to 3.25 percent. The Fed has left its benchmark rate at 5.25 percent for the past three meetings, after 17 straight quarter-percentage point increases since June 2004.
Traders see a 51 percent chance the Fed will reduce interest rates at the central bank's March 21 meeting. That compares with an 11 percent chance on Nov. 16.
The U.S. currency fell for three straight years through 2004 versus the euro and the yen as the country's trade deficit widened, reaching a record $1.3666 per euro on Dec. 30, 2004. It advanced against the euro and yen last year as the Fed pushed borrowing costs higher at every meeting.