Dollar Will Rebound as Fed Rate Cuts End, Europe Slows, Nomura, Daiwa Say

Nomura, Daiwa Say Dollar to Climb as Rate Cuts End (Update1)

By Kosuke Goto and Junko Kikkawa

April 16 (Bloomberg) -- Japan's two biggest brokerages said the dollar will rebound against the euro and yen by year-end as economic conditions in Europe and Japan deteriorate and U.S. interest-rate cuts near an end.

The European Central Bank will be forced to lower borrowing costs in the second half as growth in the region slows, according to Daiwa Securities SMBC Co. Yen buying isn't ``sustainable'' because the Japanese economy will cool and interest rates abroad are more attractive, said Nomura Securities Co.

``U.S. rates and yields will cease to fall and then the dollar weakness will bottom out,'' Takahide Nagasaki, senior currency strategist at the unit of Daiwa Securities Group Inc., Japan's second-largest securities firm, said at a financial seminar in Tokyo yesterday.

The dollar will gain 8 percent to 110 yen this year and 9 percent to $1.45 per euro, Nagasaki said. Nomura Securities predicts the same levels, making the two firms more bullish on the currency than the median estimates in Bloomberg News surveys of 100 yen and $1.48.

The U.S. currency declined 9 percent this year to 101.74 yen and 7.6 percent to $1.5780 per euro as of 12:15 p.m. in Tokyo. It fell to $1.5913 on April 10, the lowest since the European currency's debut in January 1999 and slumped to a 12-year low of 95.76 yen on March 17.

ECB Quandary

``The more the ECB delays a rate cut, the more the central bank will be forced to cut rates in the future because the economy would be getting worse,'' Daisaku Ueno, a senior economist at Nomura Securities, said in an interview with Bloomberg Television. ``In the long run, it's a good time to do bargain-hunting on the dollar.''

Ueno was named Japan's No. 1 foreign-exchange analyst in a survey conducted by Nikkei Research Inc., a marketing research company last month.

Interest rates in Europe are 4 percent compared with 2.25 percent in the U.S. and 0.5 percent in Japan.

Bank of America Corp. predicts the ECB will lower rates in September, and Royal Bank of Scotland Group Plc expects a cut in the third quarter.

ECB Executive Board member Juergen Stark said rates may not be high enough to contain inflation after French prices jumped 3.5 percent in March from a year earlier. Council member Nicholas Garganas said price pressure ``is more intense than previously foreseen'' and Miguel Angel Fernandez Ordonez said the central bank is ``always more worried about inflation'' than economic growth.

Yen Holdings

The Federal Reserve will lower its overnight lending rate between banks to 1.75 percent this quarter and raise it back to 2.25 percent during the second quarter of 2009, according to the weighted average of forecasts in a Bloomberg survey.

Futures traders cut bets the Fed will lower its benchmark rate by a half-percentage point on April 30 to 28 percent compared with a 42 percent likelihood a week ago. The rest of the odds are for a quarter-point reduction.

Ueno at Nomura Securities, a unit of Nomura Holdings Inc., Japan's largest securities firm, said investor purchases of the yen have been excessive and are due for a correction.

Figures from the Washington-based Commodity Futures Trading Commission last week showed 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 drop -- so-called net longs - - was 43,067 on April 8, close to a record high of 65,920 set on March 25. The number is sometimes seen as a contrary indicator.

``Investors have already piled up huge long-yen positions,'' said Ueno. ``Investors are buying the yen by borrowing more expensive money abroad. It's not sustainable.''

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net.