Dollar Drops to Record Low Versus Euro on U.S. Growth, Rates
By Min Zeng
July 14 (Bloomberg) -- The dollar fell to a record low against the euro and the weakest in 26 years versus the pound on speculation declining consumer spending will weaken the economy and dim the allure of U.S. assets.
The U.S. currency dropped a fifth straight week against the euro and pound amid growing bets that the Federal Reserve will cut interest rates this year to spur growth. U.S. reports next week are forecast to show a slowdown in housing starts and manufacturing, which may fuel more dollar selling.
``The market sentiment is still to sell the dollar,'' said Jeff Gladstein, global head of currency trading at AIG Financial Products in Wilton, Connecticut. ``There is nothing fundamental to change that direction right now.''
The dollar fell 1.1 percent this week to $1.3782 per euro and reached $1.3814 per euro yesterday, the lowest since the European currency's debut in January 1999. The U.S. currency declined 1.2 percent to $2.0343 per pound and touched $2.0367 yesterday, the weakest since June 1981. Gladstein said the dollar will slide to $1.4 per euro next week.
The U.S. currency also dropped 1.2 percent to 121.93 yen this week and 1.5 percent against the Australian dollar. The Australian dollar rose above 87 U.S. cents yesterday for the first time since February 1989.
Interest Rates
The Fed kept its benchmark overnight rate at 5.25 percent for an eighth straight meeting on June 28. The rate compares with benchmarks of 4 percent in the euro zone, 5.75 percent in the U.K. and 6.25 percent in Australia. Japan's rate is 0.5 percent.
Traders raised bets the Fed will cut rates. The yield on fed funds futures contracts due in December fell to 5.215 percent this week from 5.235 percent a week earlier and 5.26 percent a month ago. The current yield suggests traders see a 21 percent chance the Fed will cut its benchmark to 5 percent by year-end. The probability was 9 percent a week earlier.
Investors also sold dollars after Moody's Investors Service cut ratings on bonds backed by U.S. subprime mortgages this week, while Standard & Poor's threatened to do the same. The moves raised concern that the losses will spread to other securities.
U.S. retail sales last month dropped 0.9 percent, the most in almost two years, after a 1.5 percent increase in May, the Commerce Department said yesterday.
Last Hope
``Retail sales is the piece of data to destroy the last standing hope of dollar bulls,'' said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. ``We are going to see a consumer-led slowdown through the rest of the year, which doesn't bode well for the dollar.''
Fed Chairman Ben S. Bernanke will deliver his semi-annual testimony before the House Financial Services Committee on July 18 and to the Senate Banking Committee the following day.
Manufacturing probably slowed this month in both the New York and Philadelphia areas, according to surveys slated for release next week by Fed banks of the two regions. Housing starts also may have slowed last month, a Commerce Department report may show.
The U.S. also releases monthly inflation data. Consumer prices may have risen at a 2.6 percent annual pace last month, down from 2.7 percent in May, according to the median forecast in a Bloomberg News survey. The government releases the data on July 18.
Break Through
After breaking through barriers related to options trades at $1.38, the euro is now facing more selling, or so-called resistance, at the $1.3830 level, said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.
``We are not going to see an explosive down move in the dollar, it's going to be a slow crawl from now on,'' Kassel said.
The yen advanced from a record low versus the euro yesterday, erasing a weekly decline, after Iran asked Japan's oil refiners to pay for Iranian crude oil in the Japanese currency instead of dollars.
National Iranian Oil Co., known as NIOC, asked the refiners to use the yen exchange rate quoted at the Bank of Tokyo Mitsubishi UFJ Ltd. on the date cargoes are loaded, according to a letter obtained by Bloomberg News. The letter was dated July 10 and signed by Ali A. Arshi, general manager for crude oil marketing and exports in Tehran. The change is ``effective immediately,'' the letter said.
``This will create demand for the yen,'' said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. Companies in Japan will ``have to sell dollars to raise money to pay for oil.''
For the week, Japan's currency ended little changed at 168.05 per euro. It touched a record low of 168.95 yesterday.
To contact the reporter on this story: Min Zeng in New York at
mzeng2@bloomberg.net .
Last Updated: July 14, 2007 09:34 EDT
