Dollar Falls to Record Low Versus Euro as Bets on Fed Cut Mount
By Lukanyo Mnyanda and Stanley White
Oct. 26 (Bloomberg) -- The dollar fell to a record low against the euro before a report that may show waning U.S. consumer confidence, adding to the case for the Federal Reserve to cut interest rates.
The U.S. currency headed for a third weekly decline versus the euro as an unexpected drop in U.S. durable goods orders yesterday combined with increased speculation about corporate losses linked to the housing slump. American International Group Inc. fell the most 12 weeks in New York on speculation it will write down assets linked to the collapse of the subprime- mortgage market.
``The dollar is suffering from fading yield support at a time when the market thinks the Fed will have to cut rates again,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``The bias is for continued dollar weakness'' and the currency may trade between $1.42 and $1.45 for the rest of the year, Sharma said.
The dollar traded at $1.4362 as of 10:21 a.m. in London, after falling to an all-time low of $1.4375 earlier, and from $1.4324 late yesterday in New York. It has declined against all the 16 most active currencies this week.
The U.S. currency was at 114.39 yen, from 114.51 Oct. 19. It fell to as low as 91.44 cents against Australia's dollar, the weakest since May 1984, poised for a 2.5 percent weekly decline. It also headed for a 2.3 percent loss against the New Zealand dollar.
A recovery in European stock markets this week also sparked a return to carry trades, in which investors buy assets in countries with high yields with loans in low-yielding currencies. Stock indexes in Germany and the U.K., Europe's two biggest economies, headed for weekly gains.
`Not Conducive'
It's ``probably not conducive to the dollar appreciating,'' Sharma said.
A Reuters/University of Michigan index of consumer sentiment, scheduled to be released at 10 a.m. in New York, may show confidence was the weakest this month since August 2006. The measure was probably unchanged at 82 in October, lower than the 89.6 average for the first half of the year, according to the median forecast of 62 economists surveyed by Bloomberg News.
Interest-rate futures traded on the Chicago Board of Trade show an 86 percent chance the Fed will lower its rate a quarter- percentage point to 4.50 percent on Oct. 31. The odds were 70 percent a week ago. Traders see a 14 percent chance of a half- point cut. The European Central bank kept its benchmark rate at 4 percent on Oct. 4.
`Pause for Breath'
``It could well be that we get a half a point off the Fed funds rate next week, a quarter point in December and then we pause for breath,'' said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London. ``The dollar is going to weaken.''
The U.S. currency fell against the Singapore dollar to a 10-year low of S$1.4593. It's down 0.5 percent for the week.
The worst housing slump in 16 years has deepened as the riskiest borrowers default on home loans at a record pace, causing losses at Wall Street firms.
``With the numbers of unsold houses rising, the U.S. won't be able to break out of its housing slump for one year,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``This will depress consumer confidence, adversely affecting the real economy and the dollar.'' The dollar may fall to 112 yen by year-end, he said.
Yen Declines
The yen headed for a 2 percent decline against the Australian and New Zealand dollars this week after government data showed Japan's consumer prices fell for an eighth consecutive month, damping the outlook for an increase in interest rates.
Core consumer prices, which exclude fresh food, dropped 0.1 percent in September from a year earlier, matching economists' forecasts. Industrial production fell 1.4 percent in September from a month earlier, more than the median estimate for a 1.2 percent decline.
The end of Japan's battle to escape deflation has been ``delayed,'' Economic and Fiscal Policy Minister Hiroko Ota said at a briefing after the data.
The yen has fallen against 15 of the 16 most-active currencies in the past 12 months as investors borrowed in Japan to purchase higher-yielding currencies in so-called carry trades. The Bank of Japan may leave its benchmark rate unchanged at 0.5 percent and lower its growth and inflation forecasts when it meets Oct. 31, according to economists.
``Weak consumer price numbers will encourage yen carry trades,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The BOJ may lower its forecasts next week, making it unreasonable to expect a rate hike soon.''
The yen traded as low as 164.53 against the euro, the lowest since Oct. 19, from 163.54 yesterday. It was at 164.34 as of 10:33 a.m. in London.
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