Dollar Falls to All-Time Low Versus Euro on Fed Rate Outlook
By Min Zeng
Sept. 29 (Bloomberg) -- The dollar fell to the lowest against the euro since
the 13-nation currency's debut in 1999 as slowing growth and inflation
increased speculation that the Federal Reserve will cut interest rates a second
time this year.
The U.S. currency depreciated to an all-time low versus a basket of six of
its major peers and posted the biggest monthly drop against the euro in almost
four years. The dollar may decline further next week before a government report
economists expect to show the U.S. unemployment rate rose in September to 4.7
percent, the highest in more than a year.
``Continued dollar weakness probably is still in the cards,'' said Ihab
Salib, who helps oversee $3 billion in international bonds in Pittsburgh at
Federated Investments Inc. ``I don't expect a meltdown in the dollar. It will
be a moderate depreciation.''
The dollar fell 4.5 percent to $1.4267 per euro in September, reaching the
record low of $1.4278 yesterday. It was the biggest monthly decline since
December 2003. The U.S. currency reached all-time lows in each of the past
seven trading days. The dollar posted a 5.1 percent drop in the third quarter,
the biggest since the second quarter of 2006.
The New York Board of Trade's dollar index reached 77.66 yesterday, the
weakest since the gauge began in 1973. The Fed's trade-weighted index comparing
the dollar with major currencies dropped on Sept. 25 to the lowest since its
inception in 1971.
Norway's krone was the biggest gainer this quarter, rising 9.4 percent
against the dollar, while New Zealand's dollar lost the most, falling 1.9
percent. The dollar declined 6.8 percent to 114.81 yen over the same period.
U.S. Dollar Weakness
The U.S. dollar weakened against all of the 16 most actively traded
currencies this month, falling 1.5 percent against the pound and 0.8 percent
versus the yen. For the year, the dollar has lost 7.5 percent against the euro,
4.3 percent against the pound and 3.6 percent versus the yen.
The yen fell against all the major currencies except the dollar this month as
the Fed's half-percentage-point rate cut on Sept. 18 encouraged carry-trade
investors to resume borrowing in Japan to buy higher-yielding assets elsewhere.
The yen lost 3.7 percent to 163.79 per euro, declining 7.1 percent against the
Australian dollar and 6.6 percent versus the New Zealand dollar.
Japan's currency rallied on Aug. 17 to the highest against the dollar since
June 2006 as higher borrowing costs related to subprime-mortgage losses led
investors to avoid higher-yielding assets. The yen rose this quarter against
all of the 16 most actively traded currencies except Norway's krone.
Consumer Confidence Plunges
Reports this week showed consumer confidence fell to almost a two-year low
while new-home sales sank to the lowest in seven years. The price gauge tied to
spending patterns and excluding food and energy costs, the Fed's preferred
measure, rose 1.8 percent from August 2006, the smallest annual gain since
February 2004.
Former Fed Chairman Alan Greenspan said yesterday in an interview with BBC
Radio 4 that the chance of a U.S. recession is higher now than a few months
ago.
The Labor Department will report on Oct. 5 that the unemployment rate rose to
4.7 percent this month from 4.6 percent a month earlier, according to the
median forecast of 64 economists surveyed by Bloomberg News.
Futures contracts showed 86 percent odds yesterday that the central bank will
cut its target to 4.5 percent at its next meeting Oct. 31, compared with a 14
percent likelihood a month ago.
Signs of Inflation
The euro also benefited this week as signs of rising inflation in Europe may
increase speculation that the European Central Bank will boost interest rates
before year-end.
Germany's inflation rate, measured using a harmonized European Union method,
accelerated to 2.7 percent from 2 percent in August, the Federal Statistics
Office said Sept. 27. That's the most since June 2001.
M3 money supply, which the ECB uses to measure future inflation, grew 11.6
percent from a year earlier after increasing 11.7 percent in July, the central
bank said Sept. 27.
``This will get ECB concerned, and the expectation of an ECB ease was
squashed,'' said Robert Sinche, head of global currency strategy in New York at
Bank of America Corp. ``The euro-dollar move is a combination of dollar
weakness and euro strength.''
The ECB is expected to keep its target rate at 4 percent when its board meets
on Oct. 4, according to a Bloomberg survey. The Bank of England is expected to
hold its rate at 5.75 percent the same day.
ECB President Jean-Claude Trichet yesterday told Dutch television it's ``too
early'' to decide whether financial-market turmoil will hurt economic growth in
the euro region.
The Euribor futures for delivery in December rose to 4.61 percent yesterday
from 4.49 percent a week ago. The futures dropped to as low as 4.24 percent on
Aug. 21 during the global credit crisis.
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