Dollar Falls to One-Month Low Against Yen as Fed May Limit Rate Increases
Oct. 11 (Bloomberg) -- The dollar fell to a one-month low against the yen on speculation the Federal Reserve will skip an increase to its interest-rate target at one of two remaining meetings this year.
The dollar also traded near a three-month low against the euro after sliding 1 percent on Oct. 8, when the U.S. said employment growth slowed unexpectedly in September. The U.S. currency may decline further should a report on Oct. 14 show the trade deficit widened in August, said Daniel Katzive, a currency strategist at UBS Securities LLC, in Stamford, Connecticut.
``We have only one rate increase left this year,'' said Katzive of UBS, the world's largest currency trader. ``And with a widening trading deficit report later this week, we might see the dollar extend declines.''
Against the yen, the dollar fell to 109.23 at 11:34 a.m. in New York from 109.53, according to EBS, an electronic foreign- exchange dealing system. Earlier it dropped to 109.14, the lowest since Sept. 9. The dollar traded at $1.2381 per euro, less than half a percent from the Sept. 30 low of $1.2443, its weakest since July 20.
The dollar may weaken to as much as $1.2465 per euro this week and 105 yen in 12 months, Katzive said. UBS has a 12.4 percent share of the currency-trading market, according to Euromoney magazine's 2004 poll.
Financial markets were closed today in Japan for a national holiday. The U.S. bond market is closed for Columbus Day.
U.S. employers hired 96,000 workers in September, fewer than the 148,000 economists expected. The Commerce Department on Oct. 14 may say the trade gap widened to $51.5 billion in August from $50.1 billion in July, according to the median of 58 forecasts in a Bloomberg survey. It reached a record $55 billion in June.
`Dollar Bears'
Forty-five percent of the 78 traders, strategists and investors polled on Oct. 8 from Tokyo to New York said to sell the dollar versus the yen, up from 41 percent a week ago. Thirty percent said to buy, and the rest advised holding.
``News seems to be lining up in favor of dollar bears,'' said Sophia Drossos, a currency strategist at Morgan Stanley in New York. Slowing job growth ``does raise doubts about how aggressively the Fed will raise rates.''
Fed Chairman Alan Greenspan and Governor Ben S. Bernanke will speak on oil and on monetary policy, respectively, on Oct. 14 and Oct. 15.
``Investors will be watching to see if Fed officials will downplay last week's poor jobs report,'' said Katzive.
Fed officials including Fed Bank of Dallas President Robert McTeer expressed concern last week about the U.S. current-account deficit, the broadest measure of trade and investment. The gap, a record $166.2 billion in the second quarter, may cut demand for the dollar, McTeer said in a speech in New York on Oct. 7.
A weaker dollar may narrow the shortfall because it makes it easier for U.S. exporters to cut prices abroad.
`Dominant Driver'
Investors ``are focused on McTeer's comments about the current account, with the trade deficit due out Thursday,'' said David Durrant, chief currency strategist in New York for Bank Julius Baer & Co., which manages $95 billion. ``This is a dominant driver for the dollar.''
The dollar may decline to 105 against the yen and to $1.26 per euro in the next four weeks, Durrant said.
McTeer joined San Francisco Fed President Janet Yellen and Kansas City Fed President Thomas Hoenig, who in the past month suggested the current account may widen unless the dollar declines further. The Fed doesn't set currency policy, which is managed by the Treasury.
`Could Be Trigger'
``Trade figures have regained importance'' in currency markets following the Fed officials' comments, said Mitul Kotecha, head of currency research in London at Calyon, the investment-banking unit of Credit Agricole SA.
A widening trade gap this week ``could be the trigger to push the euro above'' its recent trading range, he said. The euro has traded between $1.2461 and $1.1761 since the start of April.
Fed policy makers meet on Nov. 10 and Dec. 14. The dollar is up about 1 percent against the euro and 1.7 percent versus the yen since the year began as the Fed's three rate increases since June helped lift demand for the U.S. currency.
Yields on December federal funds futures, bets on what the target rate for overnight loans between banks will average in a particular month, fell 2 basis points after the jobs report to 2.04 percent. A basis point is 0.01 percentage point.
The yield indicates traders expect about a 30 percent chance of a rate increase to 2.25 percent that month, down from 44 percent. A Dec. 14 Fed rate increase would lift the average rate for that month to 2.14 percent. The federal funds rate is currently 1.75 percent.
ZEW Index
Gains in the euro may be limited on forecasts a report tomorrow will show German investor optimism dropped for a third month to a 16-month low.
The ZEW Center for European Economic Research's index on investor sentiment probably declined to 36 from 38.4 in September, the lowest since June 2003, according to the median of 39 forecasts in a Bloomberg News survey.
The common European currency may also decline as traders seek to take advantage of its 1 percent rally on Oct. 8 against the dollar, said Dariusz Kowalczyk, senior investment strategist in Hong Kong at CFC Securities Ltd.
``We have seen a down-trend in the ZEW and it has been pretty bad,'' said Kowalczyk. A weak ZEW may ``encourage those who sold the dollar to cash in some of the euro's gains,'' spurring the euro to fall as low as $1.2350 tomorrow, he said.
Traders last week increased bets to a record that the euro will gain against the 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 euro compared with those on a drop -- so-called net longs -- was 44,811 on Oct. 5, the most since Bloomberg began keeping records in 1999.
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