Dollar Declines to 19-Month Low Versus Euro, Breaches $1.30

Dollar Declines to 19-Month Low Versus Euro, Breaches $1.30
By Daniel Kruger and Kabir Chibber
Nov. 24 (Bloomberg) -- The dollar fell to its lowest level in 19 months against the euro on speculation the Federal Reserve will lower interest rates early next year as central banks in Europe increase them.
The U.S. currency extended its losses after breaching $1.30 against the euro for the first time since April 2005, a level where traders had placed automatic orders to sell the dollar. The European Central Bank has raised rates to an almost four-year high and President Jean-Claude Trichet on Nov. 20 said inflation remains a threat. The Fed has left rates unchanged since August.
``The break of 1.30 is a strong signal that the dollar has to weaken,'' said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt. ``The sentiment for the dollar is negative. In the euro-zone, growth will remain strong.''
The dollar traded as low as $1.3109 per euro in London earlier today and breached $1.31 in New York trading. The U.S. currency was at $1.3094 at 5 p.m., from $1.2945 yesterday. The dollar also fell to 115.90 yen, from 116.30, and to as low as $1.9351 versus the U.K. pound, the weakest in almost two years.
The euro traded at 151.71 yen, from 150.52 yesterday, after touching a record of 151.76.
The volume of trading today may have been less than usual after public holidays yesterday in the U.S. and Japan.
`Weaker Side'
``It was easier to push through'' $1.30 in an illiquid market, said Firas Askari, head currency trader at BMO Nesbitt Burns in Toronto. ``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 positions 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.
``The move we saw overnight 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.''
Implied three-month volatility, which measures expected price moves during the period, rose to the highest level in two months for the dollar versus the euro.
Reducing Forecasts
Economic advisers to President George W. Bush on Nov. 21 cut their forecasts for growth next year on a weaker housing market. Gross domestic product will increase 2.9 percent next year, slower than the 3.6 percent forecast in June, the Council of Economic Advisers said.
ECB policy maker Klaus Liebscher told Reuters today that the central bank must remain ``vigilant'' on inflation. Trichet and fellow council member Miguel Angel Fernandez Ordonez also this week said inflation is a risk.
Europe's central bank has lifted borrowing costs five times since December, to 3.25 percent, to stem inflation. 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.
The three-month Euribor futures contract for June trades at a 3.875 percent yield, suggesting traders are nearly certain the ECB will raise interest rates two more times by June to 3.75 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.
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.
European Stocks
European stocks slumped today on speculation the stronger euro will hurt exports to the U.S., the region's biggest trading partner. The U.K.'s FTSE 100 Index lost 0.3 percent. France's CAC 40 benchmark dropped 0.7 percent. Germany's DAX slid 1 percent.
The extra yield investors earn on U.S. government bonds over those in Europe has shrunk to near the lowest in 17 months, attracting investors to assets in the euro region and away from the dollar.
The narrowing yield premium on dollar-denominated debt may also encourage central banks to hold more of their foreign- exchange reserves in other currencies.
People's Bank of China Vice-Governor Wu Xiaoling said East Asia needs to reduce its reliance on dollar inflows because of the risk of a further slump in the currency. China's foreign- exchange reserves exceed $1 trillion, the world's largest.
Wu's comments were released today in an article circulated during a press conference in Beijing.
``China holds most of its reserves in the dollar and these comments may lead to speculation they will sell,'' said Tohru Sasaki, a strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. ``Diversifying reserves always puts downward pressure on the dollar.''
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