Dollar Declines on Speculation U.S. Consumer Confidence Dropped

By Ron Harui and Stanley White

Dec. 27 (Bloomberg) -- The dollar had its biggest drop this month against the yen on speculation waning consumer confidence in the U.S. will increase the likelihood for a cut in interest rates by the Federal Reserve in the first quarter.

A government report tomorrow may show sentiment in the world's largest economy declined for a third straight month. The U.S. currency also snapped a three-day winning streak against the euro on prospects the allure of dollar-denominated assets may diminish. An industry report yesterday showed U.S. holiday spending fell short of analysts' expectations.

``The data are likely to add to an economic slowdown scenario that may prompt a rate cut in the first quarter,'' said Masashi Kurabe, a currency manager in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. ``The bias is to sell the dollar.''

The dollar fell to 118.81 yen at 12:59 p.m. in Tokyo from 119.15 in late New York trading yesterday, when it reached 119.23, the strongest since Oct. 25. The U.S. currency fell to $1.3129 versus the euro from $1.3098. It will drop to $1.3140 per euro today, Kurabe said.

The yield premium on 10-year U.S. Treasuries over similar maturity German debt last week narrowed to 67 basis points, an 18- month low. A basis point is 0.01 percentage point.

The New York-based Conference Board's index of sentiment dropped to 102.0 this month from 102.9 in November, according to the median forecast of 48 economists surveyed by Bloomberg News.

Holiday retail sales rose 3 percent from 2005, less than last year's 5.2 percent increase, as a slowing housing market and higher energy costs cut into spending, MasterCard Advisors said.

Jiji Press Report
Interest-rate futures show traders see a 28 percent chance the Fed will lower its target rate by a quarter-percentage point to 5 percent in March, up from a 17 percent likelihood a week ago.

The yen accelerated its gains against the dollar after a Jiji Press report suggested the Bank of Japan will raise interest rates at its January meeting because of better than expected data yesterday.

Japan's government bonds also fell the most in three weeks after the Jiji article. Jiji correctly predicted 10 days before the Bank of Japan's meeting last week that it would keep rates unchanged.

The central bank will consider lifting its benchmark rate to 0.5 percent from 0.25 percent when it announces its next decision on Jan. 18, Jiji Press reported citing unnamed sources after data yesterday showed an unexpected fall in the unemployment rate and a smaller-than-expected decline in household spending.

Retail Sales
The central bank will include the possibility of raising rates in its meeting agenda after data yesterday showed an unexpected fall in the unemployment rate and a smaller-than expected decline in household spending, the report said.

BOJ Governor Toshihiko Fukui said last weak consumption and prices are ``somewhat weak.'' He told business leaders on Dec. 25 that the BOJ will adjust policy if prices and the economy perform in line with forecasts.

"The Jiji report is spurring yen buying," said Nobuo Ibarakai, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. ``Expectations for an interest rate hike had receded after Fukui's comments last week, so the Jiji report will have a big impact on the yen.''

Japan's currency may strengthen to 118 per dollar today, he said.

Gains in the yen may be limited after a government retail sales rose less than expected last month.

The currency is set for a second straight annual decline as interest rates in Japan that are the lowest among major economies prompt investors to seek higher returns offshore.

Traders have still cut bets that the Bank of Japan will raise borrowing costs in January. The household spending report showed an 11th month of declines and gains in consumer prices failed to beat forecasts.

"It's hard to find a reason to buy the yen," said Stephen Halmarick, co-head of economic and market analysis at Citigroup Australia in Sydney. ``This is yet another set of disappointing numbers out of Japan.''