Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation

Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation
By Kim-Mai Cutler and Ye Xie
Feb. 27 (Bloomberg) -- The dollar weakened below $1.50 per euro for the first time on speculation Federal Reserve Chairman Ben S. Bernanke will indicate the U.S. central bank is ready to cut interest rates from a three-year low. The dollar also dropped after German business confidence unexpectedly strengthened for a second month in February, prompting traders to reduce bets the European Central Bank will cut rates. The currency fell to an all-time low against the Swiss franc and to a 23-year low versus the New Zealand dollar.
``We're in a new regime for the dollar,'' said Bilal Hafeez, London-based global head of currency strategy at Deutsche Bank AG, the world's biggest foreign-exchange trader. ``The proximate cause has been European data, which has indicated that Europe hasn't suffered on the growth side as the U.S. has.''
The dollar touched $1.5088 per euro, the weakest since the European currency's debut in January 1999, before trading at $1.5052 as of 8:34 a.m. in New York, from $1.4974 yesterday. It fell to 106.32 yen from 107.28 yen, coming within 1.2 percent of a 2 1/2-year low reached in January, and dropped as low as 1.0665 francs, from 1.0756. The euro fell to 159.99 yen from 160.67. The dollar may fall to $1.55 per euro by the end of March, Hafeez predicted.
Europe's single currency remained higher against the dollar after ECB policy maker Axel Weber said investors betting on rate cuts in the region are underestimating inflation.
Bernanke will deliver his semi-annual testimony to the House Financial Services Committee at 10 a.m. in Washington. He will appear before the Senate Banking Committee tomorrow.
Rate Differentials
The New Zealand dollar rose to 82.13 U.S. cents from 81.71 cents on speculation the interest-rate differential will widen in favor of assets outside of the U.S. The Australian dollar climbed to 93.92 U.S. cents, from 93.38, reaching the strongest since November's 23-year high. New Zealand's key interest rate is 5.25 percentage points higher than the Fed's 3 percent rate. Australia's is 4 percentage points more.
A Fed trade-weighted index of the dollar against major currencies has fallen about 11 percent in the past year. The U.S. Dollar Index traded on ICE Futures in York, which tracks the currency against six major counterparts, dropped to 74.23 today, the lowest since the gauge started in 1973.
The currency also dropped to an all-time low of $1.5088 against the synthetic euro, a theoretical value that estimates the European currency's price as far back as January 1989, when Bloomberg's data on the series begin. Contrast With ECB The dollar extended losses after a government report showed orders for U.S. durable goods fell last month. Orders dropped 5.3 percent, following an increase of 4.4 percent the previous month, the Commerce Department said. The median forecast in a Bloomberg News survey was for a decline of 4 percent.
The U.S. currency has 12 percent versus the euro in the past year. It has weakened against all but one of the 16 most- active currencies as subprime-mortgage losses, the worst housing slump in 25 years and soaring credit costs spurred the Fed to cut rates five times since Sept. 18.
By contrast, the ECB has held its main lending rate at a six-year high of 4 percent since June to counter inflation pressures from surging food and oil prices. Traders increased wagers on rate cuts after ECB President Jean-Claude Trichet on Feb. 7 dropped a threat to raise borrowing costs and said uncertainty about economic growth is ``unusually high.'' Underestimating Inflation ``The consensus expectation for interest rates on the market at the moment clearly underestimates, in my opinion, the inflation risks,'' Weber said today, according to the text of a speech in Bonn. ``In 2009, inflation will not slow as markedly as supposed in the December projections, which were based on lower oil prices.'' The slump in the dollar helped push oil prices to a record above $102 today and increased the cost of buying wheat, sugar, copper, cotton, cocoa and precious metals. ``We're talking about a vicious cycle if you look at price increases in commodities,'' said Stephen Jen, Morgan Stanley's global currency economist in London. ``The dollar weakens first, then food and oil prices rise, which complicates policy-making. At this point, the dollar is hurting itself.'' All of the 10 most-active currencies in Asia outside Japan gained against the U.S. currency today. Thailand's baht advanced to the highest since August 1997 as the central bank kept its benchmark rate unchanged at 3.25 percent for a fifth straight meeting. The currency rose 0.1 percent to 30.09 per dollar. Indonesia's rupiah rose 0.3 percent against the dollar dollar and the Singapore dollar touched an 11-year high of S$1.3964. The Chinese yuan advanced 0.2 percent to 7.1420.
BOA Forecast The currency will continue to trade below $1.50 for the next few weeks, Robert Sinche, head of global currency strategy at Bank of America N.A. in New York, wrote in a research note dated today. ``It's crunch time for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value. ``Bernanke may know that monetary policy alone cannot support the slowing U.S. economy.'' New home sales dropped 0.7 percent to an annual pace of 600,000 last month, the lowest level in almost 13 years, according to median forecast in a Bloomberg News survey. The Commerce Department's report is due at 10 a.m. in Washington.
The dollar will rebound to $1.48 per euro by the end of March, according to the median forecast in a Bloomberg survey of 41 analysts. Merrill Lynch & Co., the third-biggest U.S. securities firm, is the most bearish, predicting it will fall to $1.57 per euro by the end of March.
March Cut Futures on the Chicago Board of Trade show traders see a 100 percent chance the U.S. central bank will reduce the 3 percent target rate for overnight lending between banks by at least 50 basis points at their March 18 meeting, and an 8 percent likelihood of a cut to 2.25 percent. The euro also gained as a government report showed import prices in Germany, an early indicator of inflation pressure in the region's biggest economy, rose the most in 16 months in January. The single currency got a boost yesterday after the Munich- based Ifo institute said its business climate index rose to 104.1 from 103.4 in January, exceeding the 102.9 median estimate in a Bloomberg News survey and leading traders to pare bets the ECB will lower rates.
``Yesterday U.S. consumer confidence came out at a level that implies further rate easing from the Federal Reserve while German confidence data was considerably higher than market expectations,'' said Manuel Oliveri, a currency strategist at UBS AG in Zurich.