Dollar Falls a Second Day Versus Euro on U.S. Economic Concern

By Ron Harui

Dec. 31 (Bloomberg) -- The dollar fell against the euro for a second day, trimming this year’s advance to 3.3 percent, on signs the U.S. slipped further into its longest recession in a quarter-century.
The currency headed for its worst annual decline against the yen in more than two decades as the global slump and $1 trillion in credit-market losses worldwide prompted investors to sell higher-yielding assets funded with yen loans. The euro was set for the largest annual gain against the British pound since its 1999 debut on speculation the Bank of England will keep its main lending rate lower than the European Central Bank’s rate.
“The U.S. recession will probably be prolonged as the data aren’t signaling any recovery at all,” said Norifumi Yoshida, vice president of the trading section in Singapore at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest bank by assets. “The dollar is likely to weaken further into 2009.”
The dollar weakened 0.3 percent to $1.4099 per euro as of 11:10 a.m. in Tokyo from $1.4057 late in New York yesterday. The currency traded at 90.40 yen from 90.34 yen. It has fallen 19 percent this year, the most since 1987. The greenback declined 0.4 percent to 1.0565 Swiss francs from 1.0602 yesterday. It has dropped 6.7 percent in 2008.
The U.S. currency may decline to $1.48 per euro and 80 yen by the end of 2009, Yoshida said. His forecast compares with median estimates of $1.26 for the euro-dollar and 100 for the dollar-yen in a Bloomberg News survey of analysts. Currency movements may be exaggerated because of the New Year’s holidays in Japan from today to Jan. 2, he said.
The euro gained for an eighth day against the pound, increasing 0.2 percent to 97.74 British pence from 97.57 pence yesterday when it reached a record 98.03 pence. It rose to 127.59 yen from 126.97 yen.
‘Dollar Weaken’
The greenback headed for a third annual decline against the franc after the Federal Reserve cut its benchmark interest rate this month to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to revive the economy.
“The U.S. reducing rates to near zero is having an impact,” said Gerrard Katz, head of foreign-exchange trading in Hong Kong at Standard Chartered Plc, a U.K. bank that gets most of its profit from Asia, in an interview with Bloomberg Television. “In the second half of 2009, we should see the dollar weaken.”
The U.S. government this year enacted a $700 billion Troubled Asset Relief Program and used half of those funds to help banks. The Treasury this week committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.
‘Look Quite Poor’
The Institute for Supply Management’s December factory index probably dropped to 35.4, the lowest reading in almost three decades, according to a Bloomberg News survey of economists. The report is due on Jan. 2.
“The data is still going to look quite poor,” said Besa Deda, chief economist at St. George Bank Ltd. in Sydney. “It’s negative for the dollar.”
The Australian and New Zealand dollars fell, capping their biggest annual declines on record, as prices slid for commodities the nations export and investors dumped higher-yielding assets amid a worldwide economic slump.
The currencies in 2008 reached their highest levels against the U.S. dollar in more than 20 years before sliding in tandem with commodities, which account for more than half the countries’ exports. Oil prices fell yesterday, contributing to the steepest annual drop in raw-materials costs in more than half a century, after a report showed U.S. consumers are the most pessimistic they’ve been in at least 41 years.
‘Off a Bit’
“Commodity prices are off a bit after the weak consumer sentiment data in the U.S. refocused the market on the global slump,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.
Australia’s dollar fell 0.3 percent to 68.96 U.S. cents and has slid 21 percent this year. New Zealand’s dollar declined 0.2 percent to 57.52 cents and has tumbled 25 percent in 2008.
The euro surged 33 percent against the pound in 2008, heading for its best year since the currency’s 1999 introduction, after the Bank of England reduced its benchmark interest rate by 3.5 percentage points this year to 2 percent to limit the fallout from the global financial crisis.
The ECB cut its benchmark to 2.5 percent, 1.5 percentage points lower than at the start of 2008, with some policy makers indicating they may be reluctant to lower borrowing costs again next month.
To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: December 30, 2008 21:38 EST