Dollar Falls on Reduced Concern Housing Will Slow Global Growth

The dollar fell the most against the euro since March on diminished concern that U.S. housing weakness will slow global growth.

The yen posted its biggest weekly decline versus the euro since 2003 as investors returned to carry trades in which they borrow in Japan to invest in higher-yielding assets elsewhere. Global stocks rose and volatility fell as traders increased bets the Federal Reserve will cut rates in September.

``Things are calming down sufficiently enough for the market to go back to the trades that dominated prior to the shake-out: buying other currencies against the yen and selling the dollar,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, with about $250 million in funds under management.

The dollar dropped 1.5 percent this week to $1.3675 per euro, for the biggest weekly decline since mid-March. The dollar rose 1.8 percent to 116.44 yen. The yen plummeted 3.4 percent to 159.26 per euro, for the biggest loss since September 2003.

``People are calmer because they expect the Fed will cut rates in September,'' said Mark Meadows, a strategist at currency-trading company Tempus Consulting Inc. in Washington.

The yen advanced last week by the most against the euro since 2000 as the subprime mortgage crisis spread through global credit markets, spurring investors to sell riskier assets funded by loans made in Japan.

Housing Report

Purchases of new U.S. homes unexpectedly rose 2.8 percent to an annual pace of 870,000 last month, the Commerce Department said yesterday. The level exceeded the highest estimate in a Bloomberg News survey of 73 economists.

The Standard & Poor's 500 Index rose 2.3 percent for the week, the biggest gain since March. The Chicago Board Options Exchange's VIX index of stock volatility fell to 20.70 this week after reaching 37.50, the highest since 2002, on Aug. 16, the day before the Fed cut the discount rate it charges banks.

Interest rate futures show traders are certain the Fed will cut its 5.25 percent target rate for overnight loans between banks at least a quarter-percentage point by its Sept. 18 meeting. Bets a month ago suggested a 10 percent chance of a rate cut.

Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their forecasts for the dollar this week. Goldman said the dollar will weaken to a record of $1.43 in three to six months, from a previous estimate of $1.35. Merrill forecast $1.40 by December, compared with $1.36 before last week.

2007 Economic Growth

``The fundamental picture has deteriorated quite materially for the dollar,'' said Jens Nordvig, a New York- based analyst for Goldman Sachs.

The dollar reached an all-time low of $1.3852 on July 24.

The U.S. economy is forecast to expand 2 percent this year, according to a Bloomberg News survey published Aug. 9. That's 0.1 percent lower than the July forecast.

The yen dropped against all of the 16 most active currencies this week as traders returned to carry trades after the Bank of Japan on Aug. 23 kept its benchmark borrowing cost at 0.5 percent, the lowest among major economies.

Japan's key rate compares with 4 percent in the euro region, 11.5 percent in Brazil and 8.25 percent in New Zealand. The Swiss franc, another source of funding for the carry trade, fell 0.9 percent against the euro this week. Switzerland's benchmark rate is 2.5 percent.

Dollar Falls for Third Day Before Report on U.S. Home Sales

The dollar fell for a third day against the euro before a government report that's forecast to show sales of new homes in the U.S. weakened in July to the lowest in seven years.

The U.S. currency was also set for a weekly decline after the chief executive officer of the biggest U.S. mortgage lender said yesterday the economy is heading for recession and Goldman Sachs Group Inc. cut its forecast for the dollar. The yen dropped this week as global shares rebounded, prompting investors to borrow the currency to buy higher-yielding assets.

``Weak U.S. home sales data could again spark concerns over the U.S. mortgage market,'' said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt. U.S. data ``won't help the dollar to regain its ground.''

Read more at Bloomberg.com

Yen Falls Most in 3 Years as Stocks Rally Spurs Carry Trade

Source: Bloomberg.com
By Aaron Pan and Kosuke Goto

The yen fell the most in three years against the euro as stocks rallied, reviving confidence in trades that depend on borrowing in the Japanese currency to buy riskier assets.

Investors sold yen and bought the higher-yielding Australian and New Zealand dollars, which rose around 3 percent versus Japan's currency. Stocks in Europe and Asia advanced, while U.S. index futures climbed, encouraging the carry trades. The Bank of Japan kept its benchmark rate at 0.5 percent, the lowest among major economies.

``Equity markets have stabilized and riskier assets are gaining renewed support,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London. ``The yen is back under pressure.''

The Japanese currency weakened as much as 1.8 percent against the euro, the biggest drop since June 2004, before trading at 158.66 as of 7:24 a.m. in New York, from 156.20 late yesterday. The yen also fell as much as 1.6 percent against the dollar, the most since January 2005, before trading at 116.78, from 115.34.

Japan's currency briefly pared losses after one of nine members of the central bank's board, Atsushi Mizuno, voted to raise the overnight lending rate.

The central bank's governor, Toshihiko Fukui, said later in Tokyo there's a risk that keeping interest rates too low will spur risky investment. He also said the bank was watching how credit-market turmoil would affect confidence.

``One dissenting vote implies there will be a move next month,'' said Tokichi Ito, deputy general manager of foreign exchange at Trust & Custody Services Bank Ltd. in Tokyo.

Australia, New Zealand

Losses in the yen may swell should it break through 116.50 per dollar, where traders have orders to sell, said Keiichi Iguchi, a dealer in Tokyo at Resona Bank Ltd. Traders sometimes place instructions to limit losses in case bets go the wrong way.

The Japanese currency dropped 3.6 percent to 83.74 yen per New Zealand dollar and 2.9 percent to 95.74 yen from 93.03 against Australia's dollar. Investors are returning to carry trades that capture the difference in interest rates between the countries.

The yen last week posted the biggest increase against the euro since March 2000 as the subprime mortgage crisis spread through global credit markets.

Countrywide Financial Corp., the biggest U.S. mortgage lender, said it received a $2 billion capital injection from Bank of America Corp., reassuring investors the global credit rout is being contained. The shares climbed 20 percent in extended trading yesterday.

Stock Markets

The U.S. Standard & Poor's 500 Index has gained 4.1 percent in the past five days after losing 6 percent the previous five, signaling investors are regaining their appetite for risk.

Japan's benchmark rate compares with 8.25 percent in New Zealand, 6.5 percent in Australia and 5.25 percent in the U.S. The yield on the three-month euro-yen future for September rose 2 basis points to 0.85 percent today, indicating traders are betting the BOJ will increase rates at the next meeting on Sept. 18-19.

Investors saw a 39 percent chance of a rate increase next month, according to Credit Suisse Group calculations based on interest payments.

``The Bank of Japan did the right thing today,'' said Callum Henderson, head of foreign-exchange strategy at Standard Chartered Bank in Singapore. ``They'll probably wait a couple of months until there are further signs the Japanese economy is recovering. It's good news for carry trades, good news for risk.''

Volatility Eases

Volatility on one-month dollar-yen options fell to 11.40 percent from 12.35 percent yesterday. Lower volatility may encourage carry trades as it implies less risk of losing money on exchange-rate swings.

The euro traded at $1.3586 per dollar, the highest in a week, on speculation the global credit-market crisis won't hurt economic growth enough for the European Central Bank to delay raising interest rates as soon as September.

Europe's single currency headed for a two-day rally after the ECB indicated yesterday it was sticking to the policy expressed by President Jean-Claude Trichet on Aug. 2, when he pledged ``strong vigilance'' on inflation, a phrase that has signaled each of the eight rate increases since late 2005.

ECB Outlook

``The ECB's stance suggests it will probably hike rates next month,'' said Masashi Kurabe, currency manager at Bank of Tokyo- Mitsubishi UFJ Ltd. in Tokyo. ``The trend for the euro is up.''

Investors increased bets the ECB will raise rates from 4 percent next months after the Federal Statistics office in Weisbaden said Germany's economy grew 0.3 percent in the second quarter from the prior three months, unchanged from the preliminary figure.

The implied yield on the September Euribor interest-rate contract rose 9 basis points to 4.58 percent. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB key rate since 1999.

To contact the reporter on this story: Aaron Pan in London at apan8@bloomberg.net ; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Yen Falls as Investors Resume Appetite for Riskier Assets

Source: Bloomberg.com
By Bo Nielsen and Ye Xie

The yen fell against all of the most actively traded currencies as carry trade investors resumed borrowing in Japan to buy riskier assets elsewhere.

High-yielding currencies such as the Brazilian real and the New Zealand and Australian dollars were the biggest gainers against the yen as global stocks rallied. The Bank of Japan tomorrow is forecast by economists to keep its benchmark interest rate at 0.5 percent, the lowest among major economies.

``The BOJ not hiking is encouraging the carry traders to try one more time,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million funds under management. ``That's weakening the yen.''

The yen fell 0.38 percent to 114.87 against the dollar and declined 0.71 percent to 155.18 versus the euro at 10:32 a.m. in New York.

Brazil's real advanced 2.3 percent against Japan's currency, while the New Zealand dollar advanced 1 percent and Australia's dollar rose 0.9 percent.

The Swiss franc, another popular source of carry trade funding, fell 0.5 percent against the euro and 0.1 percent versus the dollar.

Japan's benchmark interest rate and Switzerland's 2.5 percent key rate compare with 11.5 percent in Brazil, 8.25 percent in New Zealand, 6.5 percent in Australia and 5.25 percent in the U.S.

The BOJ is forecast by 43 of 46 economists surveyed by Bloomberg News to hold rates steady tomorrow.

The 0.83 percent yield on three-month euro-yen futures for September indicates traders are betting the benchmark interest rate will rise a quarter percentage point to 0.75 percent by the Bank of Japan's meeting that month. The central bank last raised rates in February.

Stocks Rally

The Standard and Poor's 500 Index rose 1 percent, and the Dow Jones Industrial Average increased 0.8 percent. The Dow Jones Stoxx 600 Index of European equities added 1.6 percent to 368.18, while the Morgan Stanley Capital International Asia- Pacific Index gained 0.4 percent.

``Carry trade players are slowly putting their toes in the water now that global markets have calmed down and risk appetite has returned,'' said Boris Schlossberg, senior currency strategist in New York at Forex Capital Markets LLC.

Volatility of the one-month dollar yen option fell to 12.6 percent from 15.75 percent yesterday. That's still above the 7.5 percent average of the past 12 months. Increased volatility discourages carry trades because it makes it harder to predict the profitability of the strategy.

More `Unwinding'

``Even though the interest rate differentials are still favorable, the volatility will keep the carry trades out of the money and set them up for another round of unwinding,'' Dolan said. He forecasts the yen may rise to 110 versus the dollar if high volatility persists.

The U.S. dollar dropped against all of the most actively traded currencies except the yen and the Swiss franc on speculation the Federal Reserve will cut borrowing costs by its September meeting.

``Lower interest rates should weaken the dollar,'' said Michael Metcalfe, head of macro strategy in London at State Street Global Markets. ``That's something we have been factoring into our forecasts for some time.''

The dollar dropped 0.38 percent to $1.3517 against the European currency.

Interest-rate futures show traders see 62 percent odds the Fed will lower its benchmark rate to 4.75 percent from 5.25 percent by next month, compared with a 36 percent chance a week ago. The Fed next meets Sept. 18.

Reduced Fed Fee

The New York Fed yesterday lowered the fee that bond dealers pay to borrow its Treasuries to a record low in a bid to ease a shortage in the market for loans backed by the securities. It said in a statement the move is ``temporary.''

The Fed on Aug. 17 reduced the rate it charges banks for direct loans by 0.5 percentage point to 5.75 percent to ease a shortage of capital in credit markets, while keeping the benchmark rate unchanged. The central bank also dropped language indicating a bias toward fighting inflation and emphasized that economic growth may slow.

Treasury Secretary Henry Paulson said yesterday in an interview with CNBC that volatility in credit markets related to subprime mortgage losses will ``take time'' to subside.

The pound advanced 0.9 percent against the yen and 0.4 percent versus the dollar as traders added to bets the Bank of England will raise interest rates again as other central banks stay on hold or cut.

Investors expect the BOE to raise its benchmark rate a quarter percentage point to 6 percent by year-end, futures trading shows. The implied yield on the December interest-rate futures contract increased 11 basis points to 6.14 percent.

To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net ; Ye Xie in New York at yxie6@bloomberg.net

Yen Extends Advance as Volatility Increases Carry Trade Risk

(Source: Bloomberg.com)
By Stanley White and Ron Harui

The yen strengthened for a second day against the euro as rising volatility related to credit market turmoil increased the risk for investors to hold global securities financed by borrowing in Japan.

Japan's currency also gained versus the dollar as traders stepped up bets the Federal Reserve will cut interest rates by September while the Bank of Japan is likely to keep its benchmark rate at 0.5 percent at a two-day meeting starting today. A smaller rate differential diminishes the appeal of buying a higher-yielding asset with yen, known as a carry trade.

``Volatility makes yen carry trades an impractical strategy, so people will push it higher against the euro,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The BOJ won't raise rates while there's instability in global markets and the Fed is likely to lower rates soon. The initial reaction would be to sell the dollar.''

The yen rose to 153.93 per euro at 10:51 a.m. in Tokyo from 154.08 late in New York yesterday. It was at 114.40 against the dollar from 114.43. Japan's currency may rise to 153 against the euro and 114.05 per dollar today, Soma said.

Volatility on one-month dollar-yen options rose as high as 16.2 percent, more than twice the 12-month average. Rising volatility discourages carry trades because it implies the bets will be exposed to greater exchange-rate fluctuations.

U.S. Treasury Secretary Henry Paulson said yesterday in an interview with CNBC that volatility in credit markets related to subprime mortgage losses will ``take time'' to subside.

'All of the Tools'

The yen climbed today against the 16 most-active currencies, including the Australian and New Zealand dollars, favorites of the carry trade. Australia's dollar fell 0.4 percent to 91.34 from 91.73 in New York yesterday and New Zealand's declined 0.7 percent to 79.17 from 79.71.

Japan's benchmark rate compares with 8.25 percent in New Zealand and 6.5 percent in Australia.

The benchmark Nikkei 225 Stock Average fell 0.3 percent. It has lost 12 percent in the past month as investors sold riskier assets such as stocks.

Senate Banking Committee Chairman Christopher Dodd said yesterday Fed Chairman Ben S. Bernanke agreed to use ``all of the tools at his disposal'' to restore stability in financial markets roiled by the subprime mortgage crisis. Dodd made the comments after a meeting with Bernanke and Paulson in Washington.

``A cut in the Fed funds rate may be what needs to be done,'' said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. ``We could see the dollar come under some downward pressure.''

Fed Action

U.S. interest-rate futures show traders yesterday saw a 90 percent chance the Fed will lower its target rate to 4.75 percent from 5.25 percent by its September meeting, up from 70 percent odds on Aug. 20.

The Fed on Aug. 17 reduced the rate it charges banks for direct loans by 0.5 percentage point to 5.75 percent and dropped language indicating a bias toward fighting inflation and highlighted a rising threat to economic growth.

The New York Fed yesterday lowered the fee that bond dealers pay to borrow its Treasuries to a record low in a bid to ease a shortage in the market for loans backed by the securities. The Fed said in a statement the move is ``temporary.''

Unlikely to Recover

The BOJ will hold rates at the lowest among major economies, according to 43 of 46 economists surveyed by Bloomberg News.

The yield on three-month euroyen futures for September, at 0.82 percent, indicates traders are betting the BOJ will raise rates a quarter-percentage point to 0.75 percent at its September meeting. The central bank last raised rates in February.

``Risks to our forecast of another BOJ rate hike on Sept. 19 appear to be growing significantly,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America N.A. in Tokyo. ``Even though the panic may have passed, risk appetite by Japanese investors is not likely to recover to the extreme levels before the recent unwinding of the carry trade.''

Governor Toshihiko Fukui, whose five-year term ends in March, has said before that leaving borrowing costs abnormally low will fuel risky investments. Atsushi Mizuno was the only policy board member to oppose the bank's decision last month to keep rates on hold.

``If one or two members vote against the BOJ skipping a rate hike at the meeting starting today, that would indicate a September rate hike,'' said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. ``It would raise concern over stock prices, leading to yen-buying.''

Japan's currency may move between 112 and 115 per dollar this week, he said.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net

Dollar Falls Against Euro After Unexpected Discount Rate Cut

(Source: Bloomberg)
By Min Zeng


The dollar fell versus the euro for the first time this week after the Federal Reserve cut its discount lending rate to prevent credit market losses from slowing the economy.

The dollar weakened against 14 of 16 major currencies as a reduction in borrowing costs dims the allure of U.S. assets. The decline today trimmed the dollar's weekly advance as investors had sought safety in the currency after a global rout of credit markets. U.S. and European stocks rallied.

``The Fed has taken the first step to calm down the market and restore investors' confidence,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``The dollar is getting a double-whammy. A reduction in interest rates makes it less attractive. The safe-haven flow into the dollar also flooded out.''

The dollar fell 0.5 percent to $1.3491 per euro at 4 p.m. in New York, from $1.3426 yesterday. The decline today trimmed the dollar's weekly gain to 1.5 percent against the euro.

The U.S. currency advanced to the highest in more than two months against the euro yesterday after banks and hedge funds scrambled to pay back loans in the dollar from their investments in riskier assets. Losses from U.S. subprime mortgages are spreading to global credit markets. The U.S. currency has rebounded from a record low of $1.3852 per euro on July 24.

Yen Declines

The yen fell against all 16 major currencies as the Fed's move encouraged investors to resume buying riskier assets funded by loans in Japan, in a practice known as the carry trade.

The Standard & Poor's 500 Index gained 2.4 percent today, reducing its weekly decline to 0.6 percent.

Japan's yen weakened 0.8 percent to 154.04 per euro and 0.3 percent to 114.19 per dollar. The Japanese currency also declined 1.8 percent versus the Canadian dollar, 1.9 percent against the Brazilian real, 2.1 percent versus the New Zealand dollar and 1.4 percent against the Australian dollar.

The losses in the yen today cut its weekly advance to 5.1 percent versus the euro as investors unwound carry trades over the past four days. The yen is up 3.5 percent against the dollar this week.

``The market got a temporary relief,'' said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon. ``But I don't think the unwinding of the carry trade is over. Investors' confidence still remains on shaky ground. There is still uncertainty about how many banks and funds are exposed to the subprime problem.''

Further Actions

The Fed cut the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. The central bank, in an unscheduled announcement, said it's prepared to take further actions to ``mitigate'' damage to the economy from the rout in global credit markets.

This is the first reduction in borrowing costs between scheduled Federal Open Market Committee meetings since 2001 and Ben S. Bernanke's first as Fed chairman.

``Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,'' the central bank's Federal Open Market Committee said in a statement released in Washington. ``The downside risks have increased appreciably.''

Policy makers kept their benchmark rate, the federal funds rate target for overnight loans between banks, at 5.25 percent. It compares with 4 percent in the euro region, 5.75 percent in the U.K. and 0.5 percent in Japan, the lowest among major economies.

`Provides Some Calm'

``This temporarily provides some calm,'' said Meg Browne, foreign exchange strategist at Brown Brothers Harriman & Co. in New York. ``It certainly is raising speculation that the Fed will cut the fed funds rate.''

Traders have increased bets that the Fed will cut its fed funds rate at the Sept. 18 meeting. The yield on fed funds futures contracts due that month reached 4.945 percent today from 5.1 percent a week ago and 5.245 percent a month ago. The yield suggests traders see a 100 percent chance the Fed will cut its benchmark rate by 25 basis points, up from 5 percent a month ago.

Volatility on one-month dollar-yen options fell to 15.5 percent from 17.8 percent yesterday. It earlier rose to as high as 23.5 percent, the highest since 1999. Lower volatility may encourage carry trades as it implies the bets will be exposed to smaller exchange-rate fluctuations.

The 10-year interest-rate swap spread, a gauge of what companies pay over benchmark lending rates, fell to 75.6 basis points, from 77.9 yesterday.

The yield premium on two-year U.S. Treasury notes over similar-maturity German bunds narrowed to 0.21 percentage point, from 0.27 percentage point yesterday. A smaller gap reduces the appeal of U.S. assets relative to those in the euro region.

The New York Board of Trade's dollar index comparing the U.S. currency against its six primary peers, including the euro and yen, fell to 81.426 from 81.729 yesterday and from an intraday high of 82.132 yesterday, the highest since June 29.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net