Euro Trades Near Two-Week Low Against Dollar as Bailouts Spread

By Stanley White

Oct. 1 (Bloomberg) -- The euro traded near a two-week low against the dollar on speculation governments will bail out more European banks after France and Belgium led a state-backed rescue of Dexia SA.

The 15-nation currency was also close to a two-week low against the yen after European Central Bank President Jean- Claude Trichet said a pan-European solution to the financial crisis is unlikely. The dollar recovered from its biggest decline versus the yen in more than a week on speculation the U.S. Senate will salvage a $700 billion bank-bailout plan as early as today after the House rejected it on Sept. 29.

``Selling the euro is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``It may take longer for Europe to solve its problems, because it's only just now getting started.''

The euro traded at $1.4120 as of 8:58 a.m. in Tokyo from $1.4092 late yesterday in New York, when it reached a two-week low of $1.4009. The euro was at 149.72 yen from 149.56 yen. The dollar was little changed at 106.02 yen after yesterday falling to 103.54 yen, the weakest since Sept. 16.

A $9.2 billion capital infusion for Dexia, the world's biggest lender to local governments, comes two days after Belgium, the Netherlands and Luxembourg rescued Fortis, the largest Belgian financial-services company, Britain took control of Bradford & Bingley Plc, the country's biggest lender to landlords, and Germany bailed out Hypo Real Estate Holding AG.

European Union

The European Union isn't likely to compile a bailout package similar to the U.S. because ``we are not a fully fledged federation with a federal budget,'' Trichet said in an interview with Bloomberg Television. ``Each country has to mobilize its own efforts,'' he said.

The ECB will keep its benchmark rate at 4.25 percent at a meeting tomorrow, according to all 58 economists surveyed by Bloomberg News.

The yen was little changed after the Bank of Japan's quarterly Tankan survey showed an index that measures confidence among large makers declined to minus 3 from 5, worse than the median estimate for minus 2 in a Bloomberg News survey.

Banks are being squeezed amid a surge in borrowing costs as lenders hoard cash on concern more financial institutions will fail. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent yesterday, the European Banking Federation said. The London interbank offered rate, or Libor, that banks charge each other for overnight loans climbed 431 basis points to an all-time high of 6.88 percent, the British Bankers' Association said.

Fundamentals `Irrelevant'

``There's a dollar shortage globally,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Demand for liquidity trumps the fundamentals. Fundamentally, the U.S. is awful, and Europe is awful. Fundamentals are irrelevant today.''

Foreign banks are paying the highest premiums in at least a decade to borrow in dollars in the swaps market even after the Federal Reserve more than doubled the amount of funds available to other central banks on Sept. 29 by expanding swap lines.

The Fed's actions included increasing existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The price on one-year cross-currency basis swaps between yen and dollars reached minus 70 basis points, the biggest effective premium for dollar funding since Bloomberg began tracking the data in 1997. The highest reached in 1998, during the Asian banking crisis was minus 38.5 basis points in October 1998, according to Bloomberg data.

`Mad Scramble'

``There is a mad scramble for U.S. dollar funding demand from a global U.S. dollar-based financial system,'' said Claudio Piron, Singapore-based head of Asian currency research at JPMorgan Chase & Co, the second-biggest U.S. bank by market value. ``Central banks have been extending swap lines as lenders of the last resort. The banks access this liquidity, but they hoard it for themselves as they believe it too risky to lend to anyone else.''

The U.S. Senate will try to revive a $700 billion financial-rescue package after its defeat in the House. The bill would have allowed the government to buy troubled assets from banks. Institutions posted $590 billion of losses and writedowns since the start of last year following the collapse of the U.S. subprime-mortgage market.

``The U.S. problem has been public for a while, we're dealing with it,'' said Russell LaScala, the New York-based head of foreign-exchange trading at Deutsche Bank AG, the world's biggest foreign-exchange trader. ``Traders are very confident something's going to be passed in the next seven days. That's definitely a sentiment that's being priced in the market.''

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net.

Last Updated: September 30, 2008 20:02 EDT