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12-31-2007, 08:19 AM
Dollar Heads for Second Annual Decline Against Euro on Fed Cuts


By Steven Rothwell and Ron Harui

Dec. 31 (Bloomberg) -- The Dollar fell to a two-week low against the euro, heading for a second annual decline, as traders raised bets the Federal Reserve will cut interest rates again to bolster the slowing U.S. economy.

The dollar traded at a two-week low versus the euro and yen, after weakening against 14 of the 16 most active currencies this year, as the Fed reduced borrowing costs three times to temper the worst housing slump in 16 years. A U.S. report today may show sales of existing homes held at the lowest since the National Association of Realtors began keeping records in 1999.

"Going into the end of the year, clearly markets have taken another bounce of dollar negativity on board,'' said Jeremy Stretch, senior market strategist in London at Rabobank Groep, the third-biggest Dutch bank. "The slowdown in the U.S. economy is clearly going to happen.''

The dollar fell to $1.4715 per euro as of 6:41 a.m. in New York, from $1.4723 on Dec. 28. It has lost 11.4 percent this year, and reached $1.4967 on Nov. 23, the weakest since the euro began trading in 1999. The dollar slipped to 112.11 yen, from 112.28 on Dec. 28, weakening 6 percent this year.

The British pound headed for a second annual gain versus the U.S. currency, rising 2 percent to $2.0050. The Canadian dollar was poised for its biggest yearly advance since 2003, climbing 19 percent to 98.10 Canadian cents per U.S. dollar.

Carry Trades
The yen has fallen against 10 of the 16 major currencies this year as investors bought higher-yielding assets funded by loans in Japan, known as carry trades. It declined the most against Brazil's real, slipping 13 percent to 62.964 yen. It also traded at 165.01 per euro, from 165.42, weakening 5 percent to head for an eighth straight annual loss.

Japan's benchmark interest rate of 0.5 percent, the lowest in the industrialized world, compares with 11.25 percent in Brazil and 4 percent in the 13 nations sharing the euro.

In carry trades, investors borrow funds in countries with lower lending rates and use the cash to buy debt in nations that offer higher returns. Currency fluctuations can erase the profits earned.

Odds the Fed will cut its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting rose to 90 percent from 80 percent a week ago, according to futures on the Chicago Board of Trade.

Homes Sales
The National Association of Realtors will say sales of existing U.S. homes stayed at an annual rate of 4.97 million in November, a record low, according to economists surveyed by Bloomberg News. The report will be released at 10 a.m. in Washington. Sales of new homes fell to a 12-year low last month, the government said Dec. 28.

The share of global foreign-exchange reserves held in dollars fell to a record low in the third quarter as demand for U.S. assets waned after the subprime-mortgage market collapsed, the International Monetary Fund said Dec. 28. The data suggest central banks diversified out of the dollar as it weakened to the lowest in 34 years.

The U.S. Dollar Index traded on ICE Futures in New York dropped to 75.962 today, the least since Dec. 12. The index, which values the currency's performance against those of six of its biggest trading partners, may fall to 74.48 should it close below so-called support at 75.77, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.

'Further Weakness'
"There is risk of further weakness on a close below 75.77,'' wrote Edgeley in a research note yesterday. Support is a level where buy orders may be clustered.

Support at 75.77 represents a 61.8 percent reversal of the index's gain from the Nov. 23 low of 74.484 to the Dec. 20 high of 77.854, according to a series of numbers known as the Fibonacci sequence.

The yen's advance against the dollar accelerated after it rose beyond 112.20 and 112, where automatic orders to buy the currency were placed, said Takashi Yamamoto, chief dealer at Mitsubishi UFJ Trust & Banking Corp. in Singapore.

Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way.

The yen also may gain on speculation the Bank of Japan will keep rates unchanged while the Fed lowers borrowing costs, damping the allure of dollar-denominated assets. The yield premium investors earn on two-year Treasuries over similar- maturity Japanese government bonds was 2.37 percentage points, the lowest since Dec. 20.

"A rate change in Japan is unlikely and U.S. rates may fall, so this could lead to a stronger yen versus the dollar,'' Yamamoto said. "The yen may be bought'' to 111 against the dollar today, Yamamoto forecast.

The odds the Bank of Japan will lift rates at its next meeting on Jan. 22 were unchanged at zero percent on Dec. 28, based on calculations by Credit Suisse Group using overnight interest-rate swaps.