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Dollar Falls to Three-Year Low Versus Yen on Fed `Indifference'
The dollar fell to the lowest level in almost three years versus the yen on signs the Federal Reserve sees a weakening dollar as helping the U.S. economy.
The dollar dropped below 105 yen, touching its lowest level since March 2005, after Fed Chairman Ben S. Bernanke said the weaker currency helps cut the trade deficit. The U.S. Dollar Index, which tracks the currency against six major counterparts, sank to the lowest since its start in 1973.
``The Fed is breaking new ground in expressing indifference to the U.S. dollar's decline,'' analysts led by Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co., wrote in a research note today. Merrill forecasts the euro to ``peak'' at $1.57 around the end of March.
The dollar fell as low as 104.04 yen as of 8:34 a.m. in New York, from 105.37 late yesterday and 107.17 a week ago. It declined to $1.5239 per euro, the weakest since the euro's inception in 1999, before trading at $1.5197, from $1.5193 yesterday.
The U.S. currency has lost 2.1 percent against the euro this month, the most since September. The euro is 30 percent above its debut level of about $1.17 in January 1999, and up 84 percent from an all-time low of 82.30 U.S. cents in October 2000.
While Treasury Secretary Henry Paulson reiterated yesterday he favors a strong dollar and President George W. Bush said the currency should reflect the economy's ``fundamentals,'' Bernanke told a Senate panel the declines have resulted in ``some improvement'' in the trade deficit, which ``is a positive.''
`Bernanke Shock'
``This is the Bernanke shock, causing much faster dollar depreciation than expected,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets.
Bernanke also said a housing slump may cause smaller U.S. banks to fail and unemployment to increase, fueling speculation Fed policy makers will increase the pace of interest-rate cuts.
The chances of a 75 basis-point cut to 2.25 percent by March 18 have risen to 60 percent from 2 percent a week ago, according to futures on the Chicago Board of Trade. The balance of bets is on a half-percentage point reduction.
``It's become all one-way traffic against the dollar,'' said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. ``The market has inferred from Bernanke's comments that he's endorsed the recent trend.''
Oil, Gold
The dollar remained lower as reports showed consumer spending quickened in January, while incomes slowed. The 0.4 percent rise in spending followed a 0.3 percent gain in December, the Commerce Department said. The Fed's preferred measure of inflation climbed 0.3 percent, the most in four months.
The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, declined to 73.56 today. The dollar dropped to 3.1845 versus Malaysia's ringgit and 28.88 Thai baht, both the weakest in more than a decade, on speculation U.S. rate cuts will prompt fund managers to shift investment into Asia.
The slump in the U.S. currency helped push the price of oil to a record of $103.05 and gold to an all-time high of $976.32 an ounce in London.
Carry-Trade Favorites
The yen gained against all 16 most-active currencies today as stocks fell in Europe and Asia. The MSCI Asia-Pacific Index of regional shares fell 1.2 percent. The yen rose 1.3 percent to 158.03 per euro, the largest gain in five weeks, from 160.10 yesterday as investors bought higher-yielding assets with cheaper loans in Japan.
``Bernanke's comments heightened negative sentiment on U.S. economic fundamentals,'' said Joseph Kraft, head of capital markets in Japan at Dresdner Kleinwort, the investment bank owned by Germany's Allianz SE. The possibility of bankruptcies among local banks ``may have reduced investors' tolerance for risk, prompting yen-buying,'' he said. The yen may rise to 102 per dollar in a month, Kraft said.
The Japanese currency climbed 2.2 percent to 97.78 versus Australia's dollar, 2.2 percent to 84.01 per New Zealand dollar and 3.2 percent to 13.4956 against South Africa's rand.
The currencies are favorites for so-called carry trades, in which investors get funds in a nation with low borrowing costs and invest in one with higher rates. The risk in that strategy is that swings in exchange rates erase those profits.
Volatility Jumps
Implied volatility on one-month dollar-yen options rose to 14 percent, the highest since Jan. 23, from 11.48 percent yesterday. Traders quote the gauge of expectations for currency moves as part of pricing options. Japan's 0.5 percent benchmark interest rate compares with 7 percent in Australia, 8.25 percent in New Zealand and 11 percent in South Africa.
The dollar weakened the most against Brazil's real this month, declining 4.8 percent to 1.6817 reais.
After trading between $1.43 to $1.49 per euro since November, the dollar decline gained momentum when Fed Vice Chairman Donald Kohn said on Feb. 26 that credit-market turmoil posed a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time. The dollar fell past $1.51 on Feb. 27 after Bernanke told a House panel policy makers ``will act in a timely manner'' to support growth.
The euro's gains this month against the dollar got another boost yesterday after European Central Bank President Jean- Claude Trichet said ``price stability is a necessary condition'' for ongoing economic expansion. The ECB next meets on March 6 to set its key rate, now at 4 percent.
Australia's dollar climbed 4.4 percent against the U.S. currency in February. The Reserve Bank of Australia will probably raise its benchmark rate on March 4 to 7.25 percent, according to the median forecast in a survey by Bloomberg News.
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