Dollar Gains as Fed May Cut Rates Less to Avoid Recession
By Stanley White and Ron Harui
Dec. 10 (Bloomberg) -- The dollar rose against 12 of the world's 16 most-active currencies on speculation the U.S. can avoid recession without the Federal Reserve reducing its benchmark interest rate by a half-percentage point tomorrow.
The U.S. currency gained the most against the New Zealand dollar and the South African rand as traders pared bets the Fed will cut the target for the overnight lending rate between banks to 4 percent from 4.5 percent. The dollar was near a one-month high against the yen and its strongest in more than two months versus the pound before a U.S. government report this week that will probably show retail sales weathered a housing slowdown.
``The dollar is likely to strengthen,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The Fed won't have to cut rates by half a percentage point to keep the economy out of recession. Economic data aren't as bad as many of the pessimists had feared.''
The dollar bought 111.63 yen at 11:13 a.m. in Tokyo from 111.68 late in New York on Dec. 7, when it rose to a one-month high of 111.79. Against the euro, the dollar traded at $1.4647 from $1.4658. The euro was at 163.48 yen from 163.73.
The U.S. currency may rise to 112 yen and $1.4635 per euro today, Soma forecast.
The New Zealand dollar fell to 77.24 U.S. cents 77.68. The dollar rose to 6.7289 rand from 6.6975. Against the pound, the dollar traded at $2.0325 from $2.0304 at the end of last week. Versus the Canadian dollar, it was quoted at C$1.0073 from C$1.0053. The dollar was steady at 1.1289 Swiss francs.
Futures Bets
The U.S. Dollar Index, which measures the currency's performance against six of its biggest trading partners, fell to 74.48 on Nov. 23, the lowest since it began trading in 1973, as the worst housing slump in 16 years caused credit market losses at U.S. banks. The index, down 8.7 percent for the year, rose 0.1 percent today to 76.33.
Futures contracts on the Chicago Board of Trade show a 26 percent chance the Fed will lower its key interest rate by 0.5 percentage point to 4 percent this week, and 74 percent odds of a cut to 4.25 percent. A week ago the odds were 38 percent and 62 percent, respectively.
U.S. retail sales rose 0.6 percent last month after increasing 0.2 percent in October, according to the median estimate in a Bloomberg News survey. The Commerce Department will release the report on Dec. 13.
The yen may strengthen on speculation credit-market losses will spread at the world's largest banks, prompting investors to exit from higher-yielding assets funded by loans from Japan, known as carry trades.
Bank Losses
Japan's currency may snap two days of losses against the euro as analysts including ABN Amro Holding NV's Kinner Lakhani said UBS AG may have to report further credit market losses. UBS, Europe's biggest bank by assets, may cut its profit outlook as soon as today, the SonntagsZeitung newspaper said yesterday, without citing anyone.
Lehman Brothers Holdings Inc., the largest underwriter of mortgage-backed bonds, releases fourth-quarter earnings on Dec. 13. Bear Stearns Cos., the second-largest underwriter of U.S. mortgage bonds, will announce earnings on Dec. 20.
``Investors may be reluctant to take risks,'' said Yuji Saito, head of the foreign-exchange sales department in Tokyo at Societe Generale SA, France's third-biggest lender. ``We may see some buying of the yen,'' which may advance to 162.60 per euro and 111.00 versus the dollar today, he forecast.
BIS Report
Carry trades present ``very large downside risks,'' the Bank for International Settlements said in a report yesterday. They also provide ``extraordinarily high returns,'' the BIS said.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the difference between the two. Japan's benchmark rate is 0.5 percent, compared with 5 percent in Norway, 6.75 percent in Australia, and 4.25 percent in Canada.
The yen gained the most against Norway's krone and the Australian and Canadian dollars this quarter. It rose 4.5 percent against Norway's krone to 20.39, 4.3 percent versus Australia's dollar to 97.85 and 4.2 percent to Canada's dollar to 110.99.
Futures traders increased their bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 34,085 on Dec. 4, compared with net longs of 31,332 a week earlier.
Volatility implied by dollar-yen options expiring in one week with a strike price near current levels fell to 11.28 percent from 11.43 percent at the end of last week. Traders quote implied volatility, a measure of expectations for future currency moves, as part of pricing options.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: December 9, 2007 21:34 EST |
