Euro Falls for First Week Since November on ECB Rate Outlook

The euro declined against the dollar for the first week since November on speculation a weakening economy will prompt the European Central Bank to cut borrowing costs further, reducing the currency’s appeal.

The pound slid to within 2 pence of parity with the euro and touched the lowest level in almost seven years with the dollar on speculation the recession in the U.K. will deepen. The greenback rose to a three-week high against the yen as a rally in stocks and an increase in Treasury yields from record lows encouraged investors to buy dollar-denominated assets.

“The pressure on the ECB to begin to lower rates below the 2 percent level is going to be immense,” said Boris Schlossberg, director of currency research in New York at GFT Forex, an online currency brokerage, in an interview on Bloomberg Radio. “Once that occurs, the pressure on the euro is really going to take shape.”

The euro fell 1.3 percent to $1.3855 yesterday from $1.4028 on Dec. 26, the first weekly decline since Nov. 21. It touched $1.3841 yesterday, the lowest level since Dec. 19, after dropping 4.2 percent last year. The dollar rose 1.6 percent to 92.28 yen from 90.81, following a 19 percent drop in 2008. The euro increased 0.3 percent to 127.81 yen from 127.40, after sliding 22 percent last year.

Mexico’s peso was the biggest loser against the dollar this week, dropping 2.1 percent to 13.7338, as a central bank report showed dollar flows from immigrant workers abroad declined in November.

U.K. Housing

Sterling declined 0.7 percent to $1.4484 against the dollar and was little changed at 95.61 pence per euro after the Bank of England reported yesterday that U.K. mortgage approvals slid in November to the lowest level since at least 1999. The pound fell to $1.4354 on Dec. 31, the lowest level since April 2002, and dropped to 98.03 pence per euro on Dec. 30, the weakest level since the single currency’s 1999 debut.

The Bank of England lowered the benchmark interest rate to 2 percent last month, its fifth rate cut in 2008. The central bank will cut its rate to 1.5 percent when it meets on Jan. 8, according to the median forecast of 50 analysts surveyed by Bloomberg.

The yen dropped 5.4 percent to 9.87 versus the South African rand and 5.1 percent to 65.48 versus the Australian dollar as the increase in stocks boosted speculation that investors will resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.1 percent target lending rate compares with 4.25 percent in Australia and 11.5 percent in South Africa.

Stock Gains

The Standard & Poor’s 500 Index increased 6.8 percent this week after falling 38.5 percent in 2008, the biggest rout since the Great Depression. Ten-year note yields rose 0.27 percentage point to 2.40 percent.

The euro, which became the currency of Slovakia on Jan. 1, also fell against the dollar this week as a report showed yesterday that European manufacturing contracted in December at the fastest pace on record. An index based on a survey of purchasing managers by Markit Economics fell to 33.9 in December, the lowest level since the start of the data in 1998. A reading below 50 indicates a decline.

“It’s confirming everyone’s fear that the European economy continues to contract,” said Jessica Hoversen, a currency and fixed-income analyst at MF Global Ltd. in Chicago, who predicted the euro may fall in the first quarter below $1.30. “The ECB has no choice but to continue to cut rates. That’s negative for the euro.”

The ECB will lower its main refinancing rate from 2.5 percent to 1.5 percent by the second quarter of this year, according to the median forecast in a Bloomberg survey of analysts. The central bank cut the rate by 1.75 percentage points since October, the first reductions since June 2003.

Currency Trends

The moving-average convergence-divergence chart is showing a selling signal for the euro versus the dollar. The MACD index for the pair, or the difference between the 12- and the 26-day moving average, fell below the nine-day moving average yesterday for the first time since November, indicating the European currency’s rally starting last month may be over.

“Momentum funds are buying some dollars,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There are views that the dollar has been oversold.”

Zero interest rates in the U.S. may damp global demand for the greenback, hampering the government’s efforts to finance stimulus packages, some traders said.

The Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time last month and shifted its focus to debt purchases to support the economy. The U.S. budget deficit swelled to $164.4 billion in November, official figures show.

“We will be testing the tops again at $1.43 to $1.45 in near term,” said C.J. Gavsie, managing director for foreign- exchange trading at BMO Capital Markets in Toronto, referring to the euro-dollar exchange rate.

USD Slumps on Consumer Confidence

Quoted from Forexnews.com

 by Korman Tam

The beleaguered dollar found no reprieve on Tuesday, remaining mired near all-time lows versus the euro at 1.4436, and 26-year lows against the sterling just shy of the 2.07-level. Dragging the greenback lower today was a report from the Conference Board revealing a dip in consumer confidence to a new 2-year low at 95.6 for October, compared with a downwardly revised 99.5 from September. The expectations index for October fell to 80.1, versus a revised 85.0 from a month earlier.

The currency market will likely consolidate in the coming session as traders take to the sidelines ahead of Wednesday’s FOMC monetary policy decision and accompanying statement. Although the Fed funds futures are fully discounting a 25-basis point rate cut to 4.50% tomorrow, the focus will be on the language used in the subsequent policy statement. Further, the dollar may regain its footing against the majors if the Fed instead opts to leave rates unchanged at 4.75% while signaling a cut at its December meeting.

Prior to the Fed announcement, several key pieces of economic data will provide additional gauges on the state of the US economy. Growth in Q3 is estimated to fall to 3.0%, down from 3.8%. The core PCE is seen edging up to 1.5% from 1.4%, while the headline Q3 PCE is forecasted to fall to 1.5% from 4.3%. The October ADP private sector payrolls, often viewed as a proxy to the more important non-farm payrolls, are seen up slightly to 60k versus 58k. Meanwhile, the October Chicago PMI is estimated to slip to 53.0, down from 54.2.

GBP Rallies amid Tempered Rate Cut Expectations

The sterling climbed to its highest level in 26-years against the greenback while rallying sharply versus the yen prompted by overnight comments from a Bank of England board member. The BoE’s Barker pondered whether conditions have changed significantly since August that would force the Bank’s hand next week. Given the recent slate of upbeat UK economic reports, we do not expect the BoE to alter its stance when it deliberates monetary policy next week.

Cable remains buoyed near its multi-decade highs, pulling off slightly from beneath the 2.07-level. Resistance is seen at 2.07, followed by 2.0740 and 2.0775. Subsequent ceilings are eyed at 2.08 and 2.0850. Meanwhile, on the downside support begins at 2.0650, followed by 2.06 and 2.0560. Additional floors will emerge at 2.0530 and 2.05.

Euro Hovers near All-Time High

The euro remains buoyed near its record high versus the dollar near the 1.4440-level. Germany’s October unemployment rate was unchanged at 8.7%, while the unemployment change was -40k, versus -30k from September. In the Wednesday session, traders will digest Germany September retail sales, Eurozone October business climate, consumer sentiment, industrial sentiment, unemployment rate and flash inflation.

EURUSD continues to hold steady above the 1.44-level, with resistance emerging at 1.4440 and 1.4470. Subsequent ceilings are seen at 1.45 and 1.4550. On the downside, support begins at 1.44, followed by 1.4380 and 1.4350. Additional floors are eyed at 1.43, backed by 1.4250 and 1.4220.

Japanese Stocks Close Mixed Ahead Of Rate Decision

Quoted from RTTNews - Global Market News, Asian Market Update, Market & Sectors, Forex Audio News....

Japanese Stocks Close Mixed Ahead Of Rate Decision

10/30/2007 5:57:26 AM Tuesday, Tokyo shares closed mixed as investors lock in profits ahead of the U.S. Federal Reserve's and Bank of Japan's rate decisions. The Nikkei 225 Stock Average closed down 47.07 points or 0.3% at 16,651.01, recovering from the day's low of 16,492.56. The broader TOPIX index edged up 0.72 point to 1,607.21.

At around 6:13 p.m. local time, the dollar was quoted at 114.65-114.66 yen, up 0.47 yen from Monday's 5:00 p.m. quotes of 114.18-114.20.

On the economic front, the seasonally adjusted unemployment rate rose by 0.2 percentage point to 4.0% in September from the previous month. The number of jobless people totaled 2.69 million. Meanwhile, average monthly spending per Japanese household climbed a real 3.2% in September from a year earlier to 281,448 yen, a government report indicated.

Mitsubishi Motors rose 2.0% after it posted an operating profit in the fiscal first half to September, while Yamaha Motor gained 1.6% after it reported a 13% increase in net profit for the first nine months. Among other automakers, Nissan Motor added 0.6%, Mazda Motor jumped 2.3% and Suzuki Motor advanced 1.7%. But Toyota fell 0.3%.

Nippon Steel slipped 1.3% despite posting a 7.5% growth in fiscal first-half net profit. Kobe Steel shed 1.0% after its first-half net profit fell 8.8%.

Oil stocks surged after crude prices rose to record highs. Nippon Oil rose 1.6%, Nippon Mining Holdings gained 0.3%, and Showa Shell Sekiyu KK advanced 1.73%.

Among banks, Mitsubishi UFJ Financial Group climbed 1.8%, Sumitomo Mitsui Financial Group added 0.3%, and Resona Holdings surged 2.6%. Mizuho Financial Group lost 0.3%.

Gainers among high tech stocks included Fujitsu 0.2%, Matsushita Electric Industrial 1.4%, and NEC 0.9%. Losers in the sector included Advantest 3.4%, Tokyo Electron 0.6%, Kyocera 0.1%, Fanuc 1.9%, and Sony 1.4%.

Dollar Erases Gains Versus Euro as Consumer Confidence Drops

By Min Zeng

Bloomberg -- The dollar erased its gains versus the euro and yen after a report showed U.S. consumer confidence this month fell more than economists forecast.

The data may bolster speculation the Federal Reserve will cut borrowing costs tomorrow by a quarter-percentage point to prevent the biggest housing slump in 16 years from triggering a recession.

The U.S. currency traded at $1.4422 per euro at 10:07 a.m. in New York from $1.4425 yesterday, when it reached $1.4438, the weakest since the European currency's debut in January 1999. The dollar bought 114.67 yen from 114.66.

The Conference Board's index of consumer confidence declined to 95.6 this month from 99.5 a month earlier. It compared with the median forecast of 99 in a Bloomberg News poll.

The Fed cut its target rate for overnight bank loans by a half-point on Sept. 18 to 4.75 percent, the first reduction since 2003, after losses from subprime mortgage investments roiled credit markets. The dollar has dropped against all 16 of the most-actively traded currencies since then, losing 2.9 percent against the euro.

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will lower its benchmark rate by a quarter-percentage point to 4.50 percent tomorrow.

The dollar gained earlier after a Wall Street Journal report today said the Fed may not lower the rates, pushing some investors to trim bets against the U.S. currency. Rate cuts can hurt the dollar by decreasing returns on deposits in the currency.

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

U.K. Pound Rises to 26-Year High Against Dollar on Rate Outlook

By Kim-Mai Cutler

Bloomberg -- The pound rose to a 26-year high against the dollar on speculation the Bank of England will keep interest rates at a six-year high while the Federal Reserve cuts borrowing costs tomorrow.

U.K. central bank policy maker Kate Barker signaled the rate-setting committee isn't yet convinced that signs of a slowdown in Europe's second-biggest economy warrant a cut in the benchmark interest rate. Interest-rate futures imply 98 percent odds the Fed will reduce borrowing costs tomorrow.

``The market mindset is that the Fed will continue to cut rates, while in the euro zone and the U.K. there's no certainty in that respect,'' said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. ``All roads point south for the dollar.''

The currency advanced to $2.0656 against the dollar as of 12:16 p.m. after trading at $2.0663, the highest since May 29, 1981. Analysts forecast the pound to trade at $2.03 by the end of the year, compared with the $2.06 predicted by the forwards market.

While the U.S. economy is grappling with its worst housing slump in 16 years, the U.K. economy grew faster than economists forecast in the third quarter, the government said on Oct. 19. Gross domestic product increased 0.8 percent, led by services from airlines to banks.

The Bank of England has raised interest rates four times in the past year to a six-year high of 5.75 percent in July. Policy makers considered a cut this month and then voted 8-1 for no change, with only David Blanchflower in favor of a reduction to counter a jump in corporate credit costs after contagion from the U.S. subprime mortgage-market collapse.

No Change

Economists predict the rate will be unchanged on Nov. 8, the median of 37 forecasts in a Bloomberg News survey shows.

``We are asking ourselves if things are so different from August, and do we actually have to cut rates?'' Barker said in comments to the Guernsey Press and Star newspaper, which were confirmed by the central bank. She said the economy is in a slowdown rather than anything more serious, the newspaper reported.

With the bank's rate increases, the pound has strengthened 8.6 percent over the last year against the dollar.

The Fed has cut rates once this year as the housing slowdown and credit-market turmoil threatened economic growth. The bank may lower its target rate for overnight loans between banks by 25 basis points again tomorrow, to 4.5 percent, futures trading shows.

U.K. government bonds fell, with the yield on the 10-year gilt up 2 basis points to 4.87 percent.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

Bernanke Weighs Recession Risk Against Investor Cave-In Charge

(Bloomberg) -- The Federal Reserve will probably cut its benchmark interest rate today for the first time in four years, seeking insurance against a recession. The main question is how big a policy Chairman Ben S. Bernanke is ready to buy.

While a quarter-point reduction in the federal funds rate may not be enough to bolster growth and investor confidence, a half-point cut might fan inflation and be perceived as giving in to pressure from Wall Street firms that made bad bets, especially in the market for securities backed by subprime mortgages.

Bernanke and fellow policy makers ``are really caught,'' said Robert Eisenbeis, a former research director at the Fed's bank in Atlanta who attended meetings of the rate-setting Federal Open Market Committee before retiring early this year. ``The Fed needs to avoid the perception of bailing out the markets, lenders or borrowers.''

The FOMC will opt today for a quarter-point cut to 5 percent in the rate that banks charge each other for overnight loans, according to the median prediction of 134 economists surveyed by Bloomberg News. Twenty-three of the forecasters projected a half-point move, which traders think is coming sooner or later: Interest-rate futures indicate a rate of 4.5 percent by year-end. The decision is scheduled for about 2:15 p.m. in Washington.

Most-Analyzed Statement

Whatever today's decision, the statement accompanying it may be the most-analyzed in years. Reports portray a weakening economy: The Labor Department said Sept. 7 that that the U.S. last month suffered its first job losses since 2003. Investors will look for hints of further cuts -- such as a pledge to act as needed to safeguard the six-year expansion -- or language that plays down the risk of higher inflation.

``The markets will be disappointed by 25 basis points,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``If they do more now, they may be more cautiously optimistic in the statement. If they do 25 basis points, they will commit to doing more. You can argue it either way for which is the more powerful.''

The Fed's decision today will come hours after the government report on August wholesale prices; the Consumer Price Index is released tomorrow. As recently as the last FOMC meeting Aug. 7, officials said inflation was the ``predominant'' risk to the U.S. economy.

Just 10 days later, the Fed acknowledged that ``downside risks to growth have increased appreciably'' and pledged to ``act as needed.'' Policy makers will probably use similar language today, economists said.

`A Considerable Amount'

``The statement will point to the growth rate as the predominant policy influence and give the market the flexibility to price in a considerable amount of easing,'' said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former Fed economist.

Bernanke, 53, and his team may take additional steps to increase liquidity, including lowering the discount rate --which the fed charges on loans it makes to banks -- or altering terms for collateral used for loans from the central bank, economists said.

In their public comments, Fed officials have diverged in their assessments of risks to growth, making today's meeting particularly tough for analysts to handicap.

Since the August jobs report, Fed Governor Frederic Mishkin and San Francisco Fed President Janet Yellen have highlighted threats to consumer spending. By contrast, Fed bank Presidents Richard Fisher in Dallas and Charles Plosser in Philadelphia noted signs of resilience in the economy.

No Cave-In

At the same time, all agree the Fed doesn't want to be seen as caving in to funds that piled into the market for securities linked to subprime mortgages, those made to borrowers with poor or limited credit histories.

As defaults on such loans climbed, investors fled, making it tough for some companies to obtain credit; the market for asset-backed commercial paper shrank the most in at least seven years.

``It is not the responsibility of the Federal Reserve --nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,'' Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming.

Anything seen as a bailout might increase ``moral hazard'' -- spurring investors to take on even more risk, comfortable in the belief the Fed will make good their losses.

Rivlin Regrets

Former officials including Alice Rivlin, who was a Fed vice chairman under Bernanke's predecessor Alan Greenspan, have expressed regret over cutting rates three times in 1998. The economy continued to expand with little harm from turmoil in financial markets at the time, data later showed.

``The moral hazard argument is a powerful one,'' said Philip Orlando, who helps manage $260 billion as chief equity market strategist at Federated Investors Inc. in New York. As a result, he predicted, ``the market is wont to be disappointed'' by today's decision.

Others say policy makers will focus more on the recent economic data showing signs of a sputtering economy. Besides the decline in August payrolls, retail sales and industrial production rose less than forecast last month, and the Commerce Department may say tomorrow that builders broke ground on the fewest new homes since 1995.

Bernanke and fellow policy makers ``are trying to step away from the Greenspan model,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. ``But at the end of the day, they will act the same.''

Dollar Trades Near Record Low Against Euro Before Fed Meeting

(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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Yen Heads for Weekly Loss as Demand for Riskier Assets Resumes

Sept. 14 (Bloomberg) -- The yen headed for its first weekly loss in three against the dollar and euro as investors resumed purchases of higher-yielding assets funded by loans from Japan.

The Japanese yen fell against all 16 most-active currencies this week as global equities gained and a credit-market crisis eased in the U.S., prompting investors to re-enter so-called carry trades. The currency rose earlier today on media reports that Northern Rock Plc, the U.K.'s fourth-largest home lender, will receive emergency funds.

``The markets are calming down after the initial report of Northern Rock,'' said Masafumi Yamamoto, a currency economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan trader. ``Investors' risk appetite has increased this week. This led to yen-selling.''

The yen fell to 115.20 per dollar at 8:20 a.m. in London from 115.08 late in New York yesterday and 113.38 on Sept. 7. It also dropped to 160.05 per euro from 156.10 a week ago. The yen may move between 113 and 117 per dollar next week, Yamamoto said.

The yen was little changed at 233.03 per British pound, paring an advance of as much as 0.9 percent. The Bank of England will provide Northern Rock with a short-term credit line to keep it operating, on which the firm will pay an interest-rate ``premium,'' the company said.

Asian Shares Gain

The Australian dollar, a favorite of carry trades, rose to 97.10 yen from 93.72 a week ago. New Zealand's dollar, also popular for carry trades, climbed to 82.42 yen from 78.36 on Sept. 7. The Standard & Poor's 500 Index climbed 0.8 percent yesterday and the Morgan Stanley Capital International Asia- Pacific Index of regional shares advanced 1.6 percent today.

Investment trusts will market more than 2.4 trillion yen ($21 billion) of mutual funds this month that aim to buy foreign assets, according to data compiled by Bloomberg. The odds the Bank of Japan will lift the overnight lending rate on Sept. 19 fell to zero this week, based on calculations by Credit Suisse Group using overnight interest-rate swaps.

``Sales of investment trust funds are not so bad,'' said Kei Katayama, who helps oversee the equivalent of about $1 billion at Daiwa SB Investments Ltd. in Tokyo. ``Japanese retail investors are still sending money abroad constantly, stemming an appreciation of the yen,'' which may fall to 118 per dollar by year-end, he said.

Interest-Rate Gap

Japan's 0.5 percent interest rate compares with 4 percent in Europe, 5.25 percent in the U.S., 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.

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.

One-month implied volatility for the yen rose to 11.70 percent, from 11.38 percent yesterday. Dealers quote implied volatility, a gauge of expectations for exchange rate moves, as part of pricing options.

Smaller Cut?

The U.S. currency is set to snap two weeks of losses versus the yen on signs the U.S. economy can withstand the subprime- mortgage crisis, backing the case for the Federal Reserve to lower interest rates by less than a half percentage point.

The dollar also trimmed this week's decline to 0.6 percent versus the euro to trade at $1.3884, rebounding from a record low. The Commerce Department may say at 8:30 a.m. in Washington that retail sales rose 0.5 percent in August after a 0.3 percent increase the prior month, according to a Bloomberg News survey of economists.

``The report may show personal spending is solid and add to expectations the Fed won't have to cut rates by 50 basis points,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``The dollar may strengthen'' to 115.65 yen and $1.3815 per euro today, he said.

Interest-rate futures show traders pared bets on a half- percentage-point cut by the Fed at the Sept. 18 meeting to 58 percent from a 76 percent chance a week ago. The yield spread between two-year U.S. and Japanese bonds widened to 3.21 percentage points from 3.08 percentage points a week ago.

Bloomberg News: Dollar Falls to Month Low Versus Euro on Growth, Rate Views

The dollar fell to the lowest in a month versus the euro as traders bet the Federal Reserve will cut interest rates next week while the European Central Bank may boost borrowing costs by year-end.

U.S. companies unexpectedly shed jobs in August for the first time in four years, the Labor Department said Sept. 7, prompting traders to add to bets the Fed will reduce rates to 4.75 percent by Sept. 18. Two-year German government bonds yielded more than comparable-maturity U.S. Treasuries for a second trading day.

``The U.S. job losses certainly don't bode well for the prospect of the dollar, and have taken all doubt away from whether the Fed is going to cut or not,'' said David Powell, a currency strategist at IDEAglobal in New York. ``The U.S. is slowing down, while the euro zone is still strong. We are in a state of dollar weakness.''

The dollar fell to $1.3811 per euro at 9:22 a.m. in New York, after earlier touching $1.3816, the lowest since Aug. 9, from $1.3768 on Sept. 7. That compares with the record low of $1.3852 reached July 24. The U.S. currency bought 113.78 yen, from 113.38. The euro traded at 157.18 yen, from 156.10.

The U.S. dollar index comparing the currency with its six primary peers, including the pound and yen, fell to as low as 79.814, the weakest in 15 years, from 79.959 on Sept. 7.

``The dollar has gone from being a safe-haven currency to a U.S.-centric currency,'' said Mitul Kotecha, head of currency strategy at Calyon. ``The issues with the jobs numbers and weaker data in general have raised a lot of concerns about the impact of U.S. growth, and that has hit the dollar.''

Payrolls Report

U.S. nonfarm payrolls decreased by 4,000 in August from a revised gain of 68,000 a month earlier, the Labor Department in Washington said on Sept. 7. It compared with the median forecast of a 100,000 increase in a Bloomberg News survey of 88 economists. The unemployment rate held at 4.6 percent.

Interest-rate futures show a 70 percent chance the Fed will cut borrowing costs to 4.75 percent from 5.25 percent at its Sept. 18 meeting, up from 46 percent a week ago.

Investors are increasing bets the ECB will lift borrowing costs by year-end from 4 percent. The implied yield on the December futures contract rose 4 basis points, or 0.04 percentage point, to 4.49 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.

U.S. Versus Germany

The difference in yields between two-year U.S. Treasuries and comparable-maturity German bunds fell 13 basis points last week. German securities had a higher yield than their U.S. counterparts during a second day for the first time since 2004.

The dollar extended its gains versus the yen after Fed Bank of Atlanta President Dennis Lockhart said data now show job growth started weakening in June and declined to stick with his assessment that there are no ``conclusive'' signs of a slowdown beyond housing.

San Francisco Fed President Janet Yellen will speak at 8 a.m. San Francisco time. Dallas Fed President Richard Fisher will speak at noon San Antonio, Texas, time. New York Fed Governor Frederic Mishkin speaks on the economic outlook at 7:30 p.m. in New York.

Bloomberg news: Dollar

Yen Gains After Watanabe Says Japan Watching Subprime Losses

The yen gained after Japan's chief financial regulator Yoshimi Watanabe said the government is watching banks' half-year earnings for any losses related to the U.S. subprime mortgage crisis.

Japan's yen was the best performer of the 16 most-active currencies in the past month as a surge in the cost of credit caused investors will sell higher-yielding assets paid for with money borrowed in Japan.

``Watanabe's comments seemed to have made investors risk- averse, spurring yen-buying,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo.

The yen rose to 115.84 against the dollar as of 2:15 p.m. in Tokyo from 116.33 yesterday in New York. It also climbed to 157.36 per euro from 158.26. It may advance to yesterday's high of 115.34 versus the dollar and 156.54 per euro, Uchida said.

Japan's currency snapped two days of losses after Watanabe, who was named chief financial regulator last week, told reporters ``I'll be watching carefully when banks report for a clearer view of losses related to the subprime problem.''

Yen Strengthens Against Euro, Dollar on Hedge Fund Bankruptcy

The yen rose against the 16 most- active currencies after an Australian hedge fund filed for bankruptcy protection, prompting investors to sell riskier assets purchased with loans from Japan.
The currency recovered from its biggest loss in almost three years against the dollar as Sydney-based Basis Yield Alpha Fund said in the Aug. 28 petition that U.S. home loan defaults had wrecked the value of its debt holdings. The yen also rebounded from a 2.2 percent decline against the euro yesterday, when rallying U.S. stocks prompted investors to resume so-called carry trades.
``This revives concerns over how much deeper subprime mortgage losses will be,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``It's natural for carry trades to be unwound and the yen to be bought.''
Japan's currency rose to 115.97 per dollar at 11:26 a.m. in Tokyo from 116.17 late in New York yesterday, when it had the biggest loss since Jan. 2005. The yen advanced to 158.39 per euro from 158.89 yesterday, when it fell the most in more than three years. It may rise to 115.50 per dollar today, Ishikawa said.
The yen rose 0.7 percent against the New Zealand dollar to 81.71, paring yesterday's 3.3 percent surge. It gained 0.5 percent to 95.05 versus Australia's dollar. The currencies had been carry-trade favorites, with interest rates as much as 7.75 percentage points higher than in Japan.
The yen has gained 7.1 percent against the dollar since Bear Stearns Cos. said on June 22 it would bail out a hedge fund that lost money on securities related to loans to home owners with a poor credit history. Bear Stearns's rating was cut at CIBC World Markets yesterday because the fifth-biggest U.S. securities firm's profit outlook is ``ominous.'' The Basis Yield fund is run by Basis Capital Fund Management Ltd.
Carry Trades
Volatility on one-month dollar-yen options rose to 15 percent yesterday from 13.2 percent a day earlier and to 15.5 percent from 14 percent on euro-yen options. Higher volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.
Gains in the yen may be limited by speculation Japanese investors will sell the currency to purchase overseas assets.
Securities firms, asset management companies and banks in Japan will market 1.6 trillion yen ($14 billion) of investment trusts focused on offshore securities this week, according to data compiled by Bloomberg.
Japan's benchmark interest rate is the lowest in the industrial world at 0.5 percent, helping push down the yen against 12 of the 16 most-active currencies in the past year.
``I expect the yen to have a soft bias,'' said Hiroshi Yoshida, foreign exchange trader at Shinkin Central Bank in Tokyo. ``There's significant portfolio flows out of Japan today and tomorrow that should weaken the yen'' to 116.50 per dollar.
BOJ Hawk
Bank of Japan policy board member Atsushi Mizuno said the U.S. subprime crisis shows the need for higher interest rates in a speech to business executives in Kofu, central Japan. Mizuno also said Japan's consumer price index may have bottomed out in March and the pace of future price gains is likely to be gradual.
Mizuno was the sole dissenter when the BOJ kept rates on hold in July and August, proposing a rate increase at both meetings. He will hold a press conference at 1:30 p.m.
``Mizuno's comments are hardly representative of what other policy members are thinking,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The trend for Japanese prices suggests interest rates won't rise quickly enough to boost the yen.''
Japan's currency may trade between 115.30 and 116.20 against the dollar today, he said.
Inflation Report
The core consumer price index, due tomorrow at 8:30 a.m. in Tokyo, fell 0.1 percent on year in July, matching its decline in the previous month, according to a Bloomberg survey of economists.
The odds the bank will lift rates fell to 22 percent from 39 percent a week ago, based on calculations by Credit Suisse Group using overnight interest-rate swaps. Japan's retail sales fell 2.2 percent on year in July, worse than economists' forecast for a 0.8 percent decline, government data showed today.
Subprime Woes
The dollar may decline against the euro on speculation the Federal Reserve will lower interest rates next month as the subprime-mortgage turmoil threatens to crimp growth in the U.S. economy.
``Subprime woes are the main issue that may adversely affect the U.S. economy,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``The Fed is likely to cut rates next month.''
The dollar traded at $1.3652 per euro from $1.3677. It may decline to $1.3680 per euro and 115.40 yen today, Muramatsu said.
Interest-rate futures show traders see a 56 percent chance the Fed will cut its benchmark rate to 5 percent at its Sept. 18 meeting, up from 34 percent a month earlier. The chance of a cut to 4.75 percent is 44 percent.

Currency Volatility Declines as Subprime Worry Wanes (Update1)

Volatility on currency options fell further from an eight-year high touched this month as concern eases that a U.S. housing slump is spreading.
JPMorgan Chase & Co.'s index of implied volatility on options for the most-traded currencies fell to 8.19 percent yesterday, down from 8.32 percent at the close of last week, and down 5.21 percentage points from 13.4 percent on Aug. 17, the highest since 1999. Implied volatility, a gauge of traders' expectations for future price swings on currencies, is a component of option prices.
The Federal Reserve cut by a half a percentage point on Aug. 17 the rate it charges banks to borrow, to 5.75 percent, in an attempt to avert a credit crunch and restore investor confidence. Rising delinquencies on subprime mortgages forced two hedge funds managed by New York-based Bear Stearns Cos. to file for bankruptcy in July and other funds, including BNP Paribas SA in France, to halt withdrawals.
``The central banks told the markets that they were going to be involved and that things were going to be ok,'' said Evan Steed, head of currency options at TD Securities Inc. in Toronto. ``The huge panic that we had seen seems to be alleviated.''
Implied volatility on one-month dollar-yen options was at 12.88 percent today at 2 p.m. in Tokyo, down from 23.5 percent on Aug. 17, the highest since January 1999. Swings in the exchange rate increased as the yen rallied after investors, exiting prior bets the yen would fall, drove the currency to a 14-month high of 111.61 per U.S. dollar on Aug. 17. It traded at 115.41 per U.S. dollar today from 115.86 late yesterday.
U.S. Treasury three-month bills yields rose 25 basis points, or 0.25 percentage point, yesterday to 4.47 percent. On Aug. 20 they touched 2.505 percent, the lowest since February 2005 as investors sought the safety of government debt.
Volatility Decline Temporary
Sales of previously owned homes in the U.S. in July declined 0.2 percent, less than forecast, to an annual rate of 5.75 million, from 5.76 million in June, the National Association of Realtors said yesterday. New home sales unexpectedly rose in July for the second time this year, to an annual pace of 870,000, the Commerce Department said Aug. 24.
The decline in currency volatility may be temporary, until after the Sept. 1 Labor Day holiday, according to Tim Graf, derivatives strategist at Credit Suisse Holdings in New York.
``The subprime related credit issues are far from over,'' said Graf. ``For the next year or two, volatility should stay fairly elevated as people won't take risk for granted anymore. Actual volatility in the underlying currencies will stay high.''
A reduced certainty on the direction of interest rate changes by major central banks may increase swings in currencies.
ECB President Steps Back
European Central Bank President Jean-Claude Trichet stepped back yesterday from his earlier signal that interest rates will be increased next week, saying policy makers plan to wait before deciding whether financial market turbulence is hurting economic growth.
In his first public appearance since the market rout began, Trichet said in Budapest the bank was not ``pre-committed'' to raising borrowing costs on Sept. 6. He avoided repeating his Aug. 2 statement that the ECB was monitoring inflation with ``strong vigilance,'' a phrase used to foreshadow previous rate increases.
``No-one can say with any certainty what any of these central banks will do,'' said Graf. ``This will provide volatility to the currency markets in the months ahead.''
Fed funds futures contracts yesterday showed traders see a 28 percent chance the Fed will lower its target for overnight bank lending to 4.75 percent from 5.25 percent at its next meeting on Sept. 18, down from 42 percent odds on Aug. 24.

Yen Gains Against Dollar, Euro as Investors Unwind Carry Trades

The yen snapped a three-day decline against the dollar and euro as traders pared riskier investments funded by loans in Japan.

Japan's yen gained versus the 16 most-active currencies as the so-called carry trades unwound. U.S. stocks declined and a report showed the nation's sales of previously owned homes fell in July for a fifth consecutive month. The yen also benefited from speculation Japan's new Chief Cabinet Secretary Kaoru Yosano will favor an interest-rate increase.

``Risk aversion remains high and people are buying yen again,'' said Robert Fullem, manager of corporate foreign exchange sales with the Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The environment is not really conducive for putting on carry-trade positions.''

The yen rose 0.5 percent to 158.48 per euro at 2:13 p.m. in New York from 159.26 on Aug. 24. Japan's currency gained 0.3 percent to 116.14 per dollar from 116.44. Moves were exaggerated as some speculators avoided taking positions because of a public holiday in the U.K. The dollar increased 0.2 percent to $1.3649 per euro from $1.3675.

The Japanese yen advanced to as high as 149.27 per euro and 111.61 per dollar on Aug. 17 as losses from investments backed by U.S. subprime mortgages led to a global credit crunch. The credit market since then has stabilized, which helped push down the yen 1.8 percent against the dollar and 3.4 percent versus the euro last week.

The euro fell against the dollar after European Central Bank President Jean-Claude Trichet said he was never ``pre-committed'' to interest-rate increases.

Trichet on Rates

In his first public comments since the market rout began, Trichet said the bank's governing council will wait until it meets Sept. 6 before deciding whether to carry out its plan to raise borrowing costs from 4 percent. The Federal Reserve's interest rate is 5.25 percent.

``He wasn't pre-committed to a rate hike, which disappointed some investors,'' said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon, the world's largest custodian bank with over $20 trillion in assets under administration. ``The ambivalent tone hurt the euro. The dollar remains well supported by risk aversion.''

Stocks Decline

U.S. stocks declined as the Standard & Poor's 500 Index fell 0.6 percent to 1,470.14 after Lehman Brothers Holdings Inc. analysts reduced their earnings estimates for Countrywide Financial Corp., the biggest U.S. mortgage lender. U.S. Treasuries erased their early declines.

Home Depot Inc., the world's biggest home-improvement retailer, agreed to sell its construction-supply unit for $8.5 billion, cutting the price by 18 percent after the U.S. credit squeeze curbed demand for leveraged-buyout debt, three people familiar with the agreement said. An announcement may come today, the people said.

Existing home sales declined 0.2 percent, less than forecast, to an annual rate of 5.75 million, from a revised 5.76 million in June, the National Association of Realtors said in Washington. That was the slowest pace since November 2002. Sales fell 9 percent compared with a year earlier.

`Credit Crisis'

``The credit crisis isn't yet over,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``It will carry into yen crosses, and we'll still see spells of risk aversion.''

Japanese Prime Minister Shinzo Abe shuffled his cabinet today, after his ruling Liberal Democratic Party was routed in elections last month.

Yosano, a former economy and banking minister, said keeping rates near zero is ``abnormal'' before the Bank of Japan raised borrowing costs for the first time in almost six years on July 14, 2006. The central bank next meets on Sept. 18-19.

Japan's benchmark interest rate is 0.5 percent, the lowest among industrialized nations. It compares with 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.

``Monetary policy will be more important for the yen,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``Yosano is BOJ-friendly and that helps. The BOJ may raise interest rates next month.''

Japan's currency may rise to 115 against the dollar by the end of September, he said.

The yen also rose on speculation Japanese exporters bought the currency to settle month-end accounts.

`Buying the Yen'

``Japanese exporters are buying the yen,'' said Nobuaki Tani, a client manager of the Market Trading Office at Resona Bank Ltd. in Tokyo. ``Some of them are still lagging behind in their yen purchases and the currency dropped to cheap levels.''

Futures traders have reversed bets the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a fall -- so-called net longs -- was 1,516 on Aug. 21, compared with net shorts of 21,889 a week earlier.

Hedge funds swung to net long positions as they unwound investments in the higher-yielding dollar funded with borrowed yen, a practice known as the carry trade.

``The yen carry trade isn't the one-way bet that it used to be,'' said Tokichi Ito, deputy general manager of foreign exchange at Trust & Custody Services Bank Ltd. in Tokyo. ``Some speculators may look for the yen to gain against the dollar. You can't expect everyone who's been burned during the yen's appreciation to immediately rush back to yen selling.''