(Bloomberg) -- The dollar traded within a cent of its record low against the euro and reached its lowest in more than 30 years versus Canada's currency on speculation the Federal Reserve will lower its benchmark interest rate tomorrow.
The dollar has slipped against 13 of the 16 most-active currencies this month as traders bet the Fed will cut its main rate by at least a quarter-point. The New York Fed will say today manufacturing in the state fell to a four-month low in September, according to economists in a Bloomberg News survey.
``We are heading for a slow and steady easing cycle in the U.S.,'' said Michael Metcalfe, head of macro strategy at State Street Global Markets in London. ``If interest-rate differentials return to drive currencies and the Fed is likely to ease relatively to other countries, there's a lot of capacity for dollar selling from institutional investors.''
The dollar traded at $1.3869 per euro at 9:46 a.m. in London from 1.3875 late in New York Sept. 14. It touched $1.3927 on Sept. 13, the lowest since the euro was introduced in 1999. The U.S. currency dropped to C$1.0264, from C$1.0299 on Sept. 14. Earlier it reached C$1.0239, the weakest since February 1977. It was at 114.86 yen from 115.36 yen on Friday.
The dollar recouped some of its decline on comments by former Fed chairman Alan Greenspan in an interview with Dutch newspaper NRC. He said interest rates will rise toward 10 percent in Europe and the U.S. to quell inflation that will accelerate to 5 percent in the medum to long term.
The U.S. currency is down 0.4 percent versus the yen this month before figures that may show the New York Fed's general economic index dropped to 18.0 from 25.1 in August.
Futures Bets
Interest-rate futures show traders see a 58 percent chance of a half-percentage-point cut in the Fed's target for the overnight lending rate between banks from 5.25 percent. That compares with no chance one month ago.
The dollar may extend losses after Venezuelan President Hugo Chavez instructed Petroleos de Venezuela SA, the state oil company, to convert its investments from dollars to euros and Asian currencies to reduce risk. Chavez, speaking in his weekly address, said yesterday the U.S. has bought goods from around the world with paper that is ``a bubble.''
The yen gained against 11 of the 16 most-active currencies today after the Washington-based Commodity Futures Trading Commission issued a report last week, which showed traders reversed bets on the yen declining against the U.S. dollar.
Currency Volatility
Volatility implied by one-week dollar-yen options was at 14.25 percent, unchanged from Sept. 14. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options.
The difference in the number of wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called net longs -- was 5,585 on Sep. 11, compared with net shorts of 7,053 a week earlier. The yen has fallen 8.8 percent versus Australia's dollar in the past year as investors bought higher-yielding assets funded by loans in Japan.
``There has been a huge flip from being net short to net long,'' said Thio Chin Loo, senior currency strategist at BNP Paribas SA in Singapore. ``It goes to show the extent of unwinding of carry plays that we've had. We don't dismiss the dollar-yen having more downside'' to 105 by year-end, Thio said.
Australia's dollar, a favorite of carry trades because its interest rate is 6 percentage points higher than Japan's, traded at 96.50 yen from 97.13 yen late in New York on Sept. 14.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.
Liikanen Speech
The euro may rise on speculation European Central Bank council member Erkki Liikanen will reiterate today the central bank's pledge to fight inflation, fueling prospects the ECB will raise interest rates while the Fed lowers borrowing costs. The yield premium investors earn on 10-year U.S. Treasuries over similar-maturity German bunds was 0.28 percentage point, near the 2-1/2 year low of 0.25 percentage point reached last week.
``With the ECB on hold, looking like they'd like to raise rates down the road, interest-rate differentials are clearly moving against the U.S. dollar,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``That means the euro is still under some upward pressure. It could move to a record high of about $1.40 this week.''
ECB's Draghi
ECB council member Mario Draghi said on Sept. 15 the central bank is ``plainly focused on inflation expectations.'' Liikanen will speak at 2 p.m. in Turku, Finland.
Investors are betting on an ECB rate increase from 4 percent this year, interest-rate futures show. The implied yield on the December Euribor contract was at 4.44 percent today. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 18 basis points above the ECB's key rate since 1999.
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