Dollar Falls to Two-Month Low Versus Euro on Fed Cut Outlook

By Jamie McGee and Kim-Mai Cutler

Dec. 15 (Bloomberg) -- The dollar weakened beyond $1.37 per euro for the first time in two months on speculation the Federal Reserve will cut borrowing costs to near zero.

The greenback approached a 13-year low against the Japanese currency as a Fed report showed New York state manufacturing contracted in December at the fastest pace on record. The dollar dropped versus the pound and the Danish krone on reduced demand for the greenback as a haven.

“We will stay in a low-interest-rate environment for some time,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York. “That will take away interest-rate play, and the dollar will suffer.”

The dollar declined 2.1 percent to $1.3657 per euro at 11:59 a.m. in New York, from $1.3369 on Dec. 12, after touching $1.3703, the weakest since Oct. 14. The dollar slid 0.6 percent to 90.64 yen from 91.21, after reaching 88.53 yen on Dec. 12, the weakest level since August 1995. The euro rose 1.5 percent to 123.62 yen from 121.83.

The ruble fell as much as 2.2 percent to a four-year low of 37.8611 per euro after Russia’s central bank devalued the currency for a second time in a week. Against the dollar, the ruble traded at 27.7365. Russia has drained 27 percent of its reserves, the world’s third-largest, trying to stem a 16 percent decline in the currency against the dollar since August.

The dollar dropped 2.7 percent to $1.5358 against the pound and 2 percent to 5.4562 Danish krone as the cost of borrowing in the greenback tumbled to the lowest in more than four years.

Falling Libor

The three-month London interbank offered rate, or Libor, for dollars fell for a fifth day, decreasing 0.05 percentage point to 1.87 percent, the lowest level since September 2004, according to British Bankers’ Association data.

Futures traders decreased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 16,668 on Dec. 9, compared with net shorts of 20,197 a week earlier.

“People have been overly long in the dollar and are being squeezed out as risk appetite improves,” said Sebastian Galy, a currency strategist at BNP Paribas Securities SA in New York, who forecast the euro will strengthen to $1.40 before it weakens again. “That leads to the euro-dollar going higher. You move out of bearish positions into less bearish positions.”

Dollar This Year

The dollar gained 7.1 percent against the euro this year, 29 percent versus the pound and 7 percent against the krone as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.

Futures on the Chicago Board of Trade showed a 70 percent chance the Fed will trim its 1 percent target rate for overnight lending between banks at its meeting tomorrow to 0.25 percent, the all-time low, compared with zero odds a month ago.

“The dollar is going to remain under pressure until we get the outcome of the Fed meeting,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “It’s no longer the safe haven that it was previously. The Japanese yen and now the euro are beneficiaries of that.”

The dollar extended its drop versus the euro, the pound and the Danish krone after the Treasury reported that international demand for long-term U.S. financial assets weakened in October as foreign investors sold American stocks, corporate bonds and agency debt.

Investor Flows

Total net purchases of long-term equities, notes and bonds fell to a net $1.5 billion in October from $65.4 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $286.3 billion, compared with net buying of $142.6 billion the previous month.

The New York Fed’s general economic index fell to minus 25.8 this month, the lowest level since records began in 2001, from minus 25.4 percent in November, the bank said today. Readings below zero for the Empire State index signal that manufacturing is shrinking.

President George W. Bush, traveling on Air Force One from Iraq to Afghanistan yesterday, said he “signaled” his administration is considering using money from the $700 billion Troubled Asset Relief Program to help General Motors Corp. and Chrysler LLC stay out of bankruptcy. Bush said he’s “not quite ready” to announce any rescue plan.

Citigroup Inc., Goldman Sachs Group Inc., BNP Paribas SA and Bank of America Corp. predict further weakness in the dollar after a four-month, 24 percent rally. Last week was the first time in almost a month that consensus estimates for the dollar against the euro through 2009 fell, according to a Bloomberg News survey.

The U.S. currency slid 6.6 percent measured by the trade- weighted Dollar Index from a two-year high on Nov. 21 after strengthening from July to November. Since peaking three weeks ago, the dollar fell against the gauge of the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net
Last Updated: December 15, 2008 12:03 EST