Dollar Declines As Credit Market Losses May Spur Fed Rate Cuts

Dollar Declines as Credit Market Losses May Spur Fed Rate Cuts

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By Kosuke Goto and Stanley White

Nov. 6 (Bloomberg) -- The dollar fell against 12 of the world's 16 most-actively traded currencies on speculation finance industry losses will prompt the Federal Reserve to cut interest rates for a third time this year.

The currency traded near a record low versus the euro as Fed Governor Randall Kroszner said conditions for subprime-mortgage borrowers may get worse. It declined the most against the currency of New Zealand, where the benchmark rate is 3.75 percentage points higher than in the U.S.

"The rolling credit crisis and lack of confidence in the U.S. financial sector is heightening fears for the broader U.S. economy," said Greg Gibbs, a currency strategist in Sydney at ABN Amro Holding NV, the biggest Dutch bank. "The broader outlook for the dollar still looks very challenged."

The U.S. currency traded at $1.4475 per euro as of 12:33 p.m. in Tokyo from $1.4469 late yesterday in New York. It touched $1.4528 Nov. 2, the lowest since the European currency's debut in January 1999. It may decline to $1.48 by year-end, Gibbs forecast.

Against Australia's currency, it traded at 92.22 cents compared with 92.07 late in New York. The dollar was at 77.22 cents versus New Zealand's dollar from 76.98 cents. The dollar was little changed at 114.54 yen.

Demand for dollar-denominated assets has waned as credit market losses related to subprime mortgages and a housing slump spilled over into other areas of the U.S. economy. Citigroup Inc., the largest U.S. bank, projected increased losses related to mortgage defaults this week. CNBC reported that Morgan Stanley, the second-biggest U.S. securities firm by value, will write down $3 billion.

Yield Spread
U.S. Treasuries offer the lowest yields among the Group of Seven nations after Japan as the Fed cut interest rates last week for the second time, sending the dollar lower this quarter against all of the 16 most-active currencies.

Interest-rate futures traded on the Chicago Board of Trade show a 62 percent chance the Fed will reduce its overnight target lending rate between banks by a quarter-percentage point to 4.25 percent on Dec. 11 compared with 6 percent a month ago.

"Conditions for subprime borrowers have the potential to get worse before they get better," Kroszner said in remarks delivered to two separate conferences in the Washington area yesterday.

ECB Rate Signal
The euro may extend gains against the dollar on speculation European Central Bank President Jean-Claude Trichet will signal interest rates may rise further to rein in inflation from a two- year high.

The ECB will keep its key rate at 4 percent on Nov. 8, according to a Bloomberg News survey. Trichet will meet the press after the bank's decision. The euro has gained 23 percent against the dollar since the ECB raised rates eight times, starting in December 2005.

"Money will continue to flow into the euro from the dollar," said Kengo Suzuki, currency strategist in Tokyo at Shinko Securities Co., which has agreed to be taken over by Japan's second-largest publicly traded lender Mizuho Financial Group Inc. "The ECB will want to keep the option of raising rates because high energy prices represent an inflationary threat."

The euro may rise to $1.50 by year-end, he said.

Euro Technicals
The single European currency traded at 165.76 yen from 165.73 yesterday.

Citigroup Global Markets Inc. technical analysts predict the euro will decline versus the yen to 162.75 after reaching a so- called "double top."

The single European currency advanced to 167.27 yen on Oct. 31, with the previous peak a 12-week high of 167.74 on Oct. 15 and a neckline at 165 yen. The pattern indicates a currency may decline.

There's a "danger that a short-term double top is forming here," analysts led by New York-based global head of currency strategy Tom Fitzpatrick wrote in a research note yesterday. "A close below here would suggest at least a move to 162.75 and possibly back to 160.50."

Europe's single currency will trade at 163 yen by year-end, according to the median forecast of 38 analysts and brokerages surveyed by Bloomberg.