Dollar Falls Against Yen on Speculation U.S. Entering Recession

By Stanley White and Kosuke Goto

March 27 (Bloomberg) -- The dollar fell for a third day against the yen and traded near a record low against the euro before government reports that will probably signal the U.S. economy is entering a recession.

The yen rose the most in a week against the euro on speculation Japanese investors are reducing overseas holdings, as credit-market losses damp the appeal of higher-yielding assets. U.S. fourth-quarter economic growth slowed, jobless claims held close to a two-month high this week and consumer spending grew at the weakest pace in more than a year in February, Bloomberg News surveys of economists showed.

``The U.S. economy is feeble,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co., a unit of Japan's largest brokerage. ``The dollar is an unstable currency and will inevitably weaken.''

The dollar fell to 98.74 yen at 11:02 a.m. in Tokyo from 99.20 yen yesterday in late New York. The currency reached a 12- year low of 95.76 on March 17. Against the euro, the dollar traded little changed at $1.5804, after falling 1.3 percent yesterday. The yen rose to 156.07 per euro from 157.17. The dollar bought 0.9897 Swiss franc from 0.9888 yesterday.

The dollar may fall to $1.62 per euro and 90 yen this year, Amikura forecast.

The U.S. currency has fallen 8 percent against the euro this quarter and touched $1.5903 on March 17, the lowest level since the European currency debuted in 1999. Commodities gained as the weakening dollar enhanced the appeal of raw materials as a hedge against inflation. The Reuters/Jefferies CRB Index of 19 commodities has climbed 4.2 percent this week. Crude oil traded near $106 a barrel.

Dollar Weakness

``The rise in the euro and commodities is reflecting the weakness in the U.S. dollar and investors seeking an alternative store of value,'' wrote Greg Gibbs, a strategist at ABN Amro Holding NV in Sydney, in a research note. ``The case is there for further gains in the euro toward $1.60, perhaps this week.''

Futures on the Chicago Board of Trade show traders increased bets the Federal Reserve will lower the 2.25 percent target lending rate by a half-percentage point at a meeting ending April 30. The futures showed a 36 percent chance of a reduction of that size, compared with 28 percent the prior day. The remaining bets were for a cut of a quarter-point.

At 1.66 percent, the two-year U.S. Treasury note's yield was 180 basis points less than that of similar-maturity German bunds, near the widest gap since 1993. Yields on three-month Euribor futures showed that traders bet the ECB won't lower its 4 percent main refinancing rate until next year. The yield on the contract expiring in December 2008 was 4.03 percent.

U.S. Recession

The dollar has fallen 12 percent against the yen and 13 percent against the Swiss franc this quarter. The latter decline is the biggest since 1987. Analysts surveyed by Bloomberg forecast the U.S. currency will rebound to $1.45 per euro by the end of the year.

Final figures for U.S. gross domestic product may show the economy expanded an annualized 0.6 percent in the fourth quarter, according to a Bloomberg survey. That would match the previous estimate and mark a slowdown from 4.9 percent in the previous quarter. The Commerce Department releases the data today.

Martin Feldstein, the Harvard economics professor who heads the research group that determines when downturns begin, said this month that a contraction had already begun.

``An unexpected downward revision to GDP could be a catalyst for a weaker dollar,'' said Richard Grace, chief currency strategist at Commonwealth Bank of Australia, the nation's second-largest. ``We're entering a period when the U.S. dollar can overshoot to the downside. In the next month I can see the euro getting to $1.60.''

Repatriation Flows

The yen rose against the Australian dollar and the British pound on speculation Japanese investors are converting earnings on overseas investment into their home currency. For many Japanese companies, their fiscal year ends on March 31.

Japan's currency advanced 0.5 percent against the Australian dollar to 90.78 and also gained 0.5 percent per pound to 198.15.

``Repatriation flows are likely to pick up and this will boost the yen,'' said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ``Financial market turmoil increases Japanese investors' home bias.''

The yen may rise to 95 per dollar next week, he said.

Source : Bloomberg.com