Dollar Falls vs Euro, Yen as Fed Raises U.S. Recovery Concerns
By John Beresford-Peirse 12/12 06:01 quote.bloomberg.com
London, Dec. 12 (Bloomberg) -- The dollar fell against the euro and yen after the U.S. Federal Reserve lowered its key interest rate for the 11th time this year and suggested the biggest economy won't soon emerge from recession.
After trimming borrowing costs a quarter percentage point to 1.75 percent, the lowest level in 40 years, the Fed said signs of a recovery were ``preliminary and tentative.'' That raised concerns the U.S. may take longer to rebound than previously expected, hurting the dollar, analysts said.
``We're at the bottom of the (slump), so there's still some time'' before a recovery, said Tim O'Dell, who helps oversee about $25 billion at Investec Asset Management. He expects the U.S. currency to stay at about 90 cents per euro in coming weeks.
The euro rose to 89.46 cents from 89.05 late yesterday. Against the Japanese currency, the dollar was at 125.94 yen, from 126.22. It has risen 5.4 percent against the euro and 10.2 percent against the yen this year.
``Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels,'' the Fed said in a statement accompanying the rate cut. ``The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.''
Of 28 economists surveyed by Bloomberg News after the Fed's announcement, 17 said they expect another quarter-point rate cut at the bank's Jan. 30 meeting.
The Fed's comments ``have taken the wind out of the sails of those seeing a recovery in the U.S.,'' said Rob Carnell, senior international economist at Commonwealth Bank of Australia. The euro may rise to 91 U.S. cents by the end of the year, he said.
With unemployment rising in November to a six-year high of 5.7 percent and the loss of almost 800,000 jobs in the past two months, central-bank policy makers will watch consumer spending this month to gauge the depth of the recession, analysts said.
`Dollar Vulnerable'
A report tomorrow is expected to show U.S. retail sales in November erased some of the prior month's record gain, according to a Bloomberg News survey. Sales probably fell 3.1 percent, the biggest monthly loss since comparable records began in 1992, after gaining 7.1 percent in October.
``Any disappointment that the U.S. economy is about to bottom out would leave the dollar vulnerable,'' said Michael Klawitter, a market strategist at WestLB.
Earlier, the yen fell as low as 112.93 per euro, its weakest level since April 9, after a report showed business confidence in Japan fell to its lowest level in almost three years. It recently traded at 112.76, from 112.38.
The Bank of Japan's Tankan index of confidence among the nation's largest manufacturers slid to minus 38 in December from minus 33 in September. Economists expected a reading of minus 44. The better-than-expected figure helped the yen halt a four-day decline against the dollar, analysts said.
`No Light'
There was ``a bit of relief'' the survey wasn't worse, said Hans Redeker, chief currency strategist at BNP Paribas. ``That will only last one or two days, then the yen will continue to fall.'' He said the Japanese currency will probably decline to 127 per dollar by the end of the year.
Confidence at both manufacturers and non-manufacturing companies in Japan worsened from three months ago. The index for all companies except large manufacturers will probably drop further in March, the report said.
``There's no light at the end of the tunnel for Japan,'' said Lee Ferridge, head of currency strategy at Rabobank International. The yen may drop to 140 per dollar next year, he said.
The Tankan report came as Japan's economy is in its third recession in a decade. |
