By Stanley White
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Feb. 22 (Bloomberg) -- The dollar headed for a second weekly decline against the euro on speculation the U.S. economy is headed for a recession and the Federal Reserve will cut the benchmark interest rate further.
The U.S. dollar fell versus 12 of the 16 most-active currencies this week, losing the most against the Brazilian real and the New Zealand dollar, as prices of commodities those nations export reached records. Singapore's dollar rose to a decade-high to the U.S. dollar on speculation the city state's central bank wants a stronger currency to head off the worst inflation in a quarter century.
``I don't see much that can change the dollar's downtrend,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's fifth-largest broker by revenue. ``Sentiment toward the U.S. economy is fragile.''
The dollar traded at $1.4809 per euro at 6:14 a.m. in London after touching $1.4838 yesterday, the weakest since Feb. 4. The currency lost 0.9 percent against the euro over the five days and dropped 0.3 percent to 107.54 yen. The euro was little changed at 159.10 yen.
The dollar may fall to $1.4950 to the euro and 105 yen in the next two weeks, Soma said.
The yen rose versus seven of the 16 most-active currencies this week including the South African rand and Canadian dollar as falling stock prices prompted traders to shun higher-yielding assets funded by loans in Japan, or carry trades.
Inflation Outlook
The U.S. dollar fell 2.1 percent against the Brazilian real this week to 1.7095 and dropped 1.7 percent to 80.33 cents per New Zealand dollar and 1.1 percent to 5.3240 Norwegian kroner. A report yesterday that showed manufacturing in the Philadelphia region, seen as a proxy for other areas in the U.S., contracted in February sent the dollar to its biggest loss versus the euro in almost four weeks.
The Norwegian krone traded at 7.8838 per euro and the Swedish krona was at 9.3067 to the European currency. The krone may rise to 7.83 and the krona may advance to 9.11 in three months, Deutsche Bank forecast.
Ten-year Treasuries yielded 2.37 percentage points more than similar-maturity Treasury Inflation Protected Securities, the rate of consumer price increases investors expect for the next decade, compared with 2.2 percentage points a month ago.
Currencies from Norway and Sweden, two commodity exporters, tend to ``perform best'' when inflation expectations rise, said Deutsche Bank AG, the world's largest currency trader.
The so-called break even rate will widen for major economies, Bilal Hafeez, London-based global head of currency strategy at Deutsche Bank, wrote in a research note today. Norway's and Sweden's central banks are likely to raise interest rates, boosting their currencies, the report said.
Yen, Stocks
Japan's currency rose 1.5 percent this week against the South African rand to 13.8470 and advanced 0.7 percent per Canadian dollar to 106.28. Japan's benchmark interest rate of 0.5 percent, the lowest among developed nations, compares with 11 percent in South Africa and 4 percent in Canada.
The Nikkei 225 Stock Average fell 1.4 percent today following the biggest decline in a week on the Standard & Poor's 500 Index. The dollar-yen's correlation with the Nikkei 225 was 0.95 in the past year, according to data compiled by Bloomberg. A value of 1 means the two variables move in lockstep.
``The yen's fate is dependant on the stock markets,'' said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan's second- largest publicly traded lender. ``Almost every time equities sell off, people get nervous about carry trades and buy yen.''
Japan's currency may rise to 107 per dollar and 158.50 against the euro today, he said.
Fed Cuts
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 them. The risk is that currency moves erase those profits.
The dollar has lost 5.5 percent against the euro since Sept. 18, when the Federal Reserve started lowering its benchmark rate to 3 percent from 5.25 percent.
Futures on the Chicago Board of Trade show an 88 percent chance the central bank will cut its target by 0.5 percentage point to 2.5 percent at its next scheduled meeting on March 18. The remaining bets are for a 0.75 percentage point reduction.
Source : Bloomberg.com
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