Saturday 16 February 2008

Dollar Has Biggest Weekly Loss in 2008 on Signs Growth Slowing

The dollar had its biggest weekly loss this year against the euro after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates further amid mounting concern that the economy is headed for a recession.

The U.S. currency fell yesterday to the lowest level in more than a week against the euro after reports showed U.S. consumer confidence tumbled this month and New York manufacturing contracted. The Swedish krona gained against 15 of the 16 most- active currencies this week after the central bank unexpectedly raised interest rates.

``The market is reacting to bad data from the U.S. and pessimism'' from policy makers, said Geoffrey Yu, a currency strategist in Zurich at UBS AG. ``The dollar will struggle.''

The U.S. currency fell 1.2 percent this week to $1.4686 per euro, from $1.4504 on Feb. 8. It touched $1.4709 yesterday, the weakest level since Feb. 5. The euro gained 1.6 percent to 158.25 yen, from 155.71 a week earlier, its biggest gain since September.

The yen fell 0.5 percent this week to 107.82 per dollar. Japan's currency dropped this week as gains in stocks encouraged investors to buy higher-yielding assets funded by cheap loans in Japan. The Bank of Japan kept its main borrowing costs at 0.5 percent yesterday, the lowest among developed nations. The Standard & Poor's 500 Index rose 1.4 percent this week.

Bernanke's Testimony

The dollar fell about 0.5 percent against the euro on Feb. 14, the week's biggest decline, when Bernanke told the Senate Banking Committee the Fed ``will act in a timely manner as needed to support growth.'' The Reuters/University of Michigan index of consumer sentiment dropped to 69.6 in February, the lowest since 1992, from January's 78.4, the group said yesterday.

The Fed has slashed its target for overnight lending between banks by 2.25 percentage points since September to 3 percent as the housing slump deepened. Building permits probably fell to a 1.045 million annual rate last month, from 1.068 million in December, according to the median forecast in a Bloomberg survey. The Commerce Department is scheduled to release the data on Feb. 20.

Futures on the Chicago Board of Trade show a 68 percent chance the central bank will lower its target by 0.5 percentage point to 2.5 percent at its next scheduled meeting on March 18. The remaining bets are for a 0.75 percentage point reduction.

`More Cuts'

``There are more cuts down the road'' from the Fed, said Diane Hirschberg, a vice president of foreign exchange at Bank of Montreal, in New York. ``It is a weaker dollar scenario.''

The dollar has lost 5 percent against the euro since Sept. 18, when the Fed lowered its benchmark for the first time since 2003. Two-year U.S. Treasury notes yielded 119 basis points less than similar-maturity German government debt yesterday, compared with a difference of 117 basis points a week ago.

``Lower interest rates are hurting the dollar,'' said Axel Merk, who helps manage $285 million assets at Merk Hard Currency Fund in Palo Alto, California. ``Why put the money in the U.S. where all kinds of negative economic news are coming?''

Sweden's krona gained a third straight week against the euro, its longest rally since October, after the Swedish central bank unexpectedly lifted its main rate a quarter-point to 4.25 percent on Feb. 13 to curb inflation. All 24 economists surveyed by Bloomberg News had expected lending rates to be left unchanged.

The krona touched 9.2972 per euro yesterday, the strongest since November.