Dollar Falls on Reduced Haven Demand; Soros Exited Pound Bet

By Ye Xie and Molly Seltzer

Jan. 28 (Bloomberg) -- The dollar and the yen weakened to almost one-week lows versus the euro on speculation a U.S. plan to set up a “bad bank” to contain toxic debt will reduce demand for the currencies as havens.

European Central Bank President Jean-Claude Trichet said in an interview on Bloomberg Television at the World Economic Forum in Davos, Switzerland, that “very, very low” interest rates are “inconvenient.” Billionaire investor George Soros, who made $1 billion selling the pound in 1992, told reporters he’s no longer betting against the currency after it reached $1.40.

“It’s a risk-on type of situation,” said Andrew Busch, a global currency strategist in Chicago at BMO Capital Markets, a unit of Canada’s fourth-largest bank. “The market is selling U.S. dollars against major currencies.”
The dollar slid 0.8 percent to $1.3262 per euro at 12:17 p.m. in New York, from $1.3160 yesterday, when it touched $1.3330, the weakest level since Jan. 19. The yen declined 1.6 percent to 118.99 per euro from 117.08 yesterday, when it reached 119.45, also the weakest since Jan. 19. The yen depreciated 0.9 percent to 89.76 per dollar from 88.97.

The U.S. currency traded near a one-week low versus the euro before the Federal Reserve ended its policy meeting today in Washington. The central bank will keep the target rate for overnight loans between banks in a range of zero to 0.25 percent, according to the median forecast of 46 economists surveyed by Bloomberg News. The central bank may broaden the range of assets it will purchase to unclog credit markets.

‘Concrete Steps’

“If the Fed takes concrete steps to ease the tension, in this environment the dollar will weaken,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
Trichet reiterated in the Bloomberg Television interview that the ECB’s next important meeting is in March, suggesting it won’t cut interest rates next week. The central bank lowered its benchmark interest rate on Jan. 15 by a half-percentage point to 2 percent, matching a record low, as the deepening recession pressed policy makers into action.

“I said that the next important rendez-vous is in March,” Trichet told Bloomberg Television in Davos. “In March, we’ll have a lot of new information, we’ll have our own staff projections,” he said.
Sterling climbed as much as 1.7 percent to $1.4375, the highest level since Jan. 20, as concern eased that the U.K. will have to widen deficits to bail out the nation’s financial institutions. The currency plunged to $1.3503 on Jan. 23, the lowest level since September 1985, after the government announced a second bank bailout in three months.

Soros on Pound 

Soros, who gained fame more than 16 years ago when he broke the Bank of England’s defense of the pound, said he made money from the global financial crisis.
“I did actually foresee the fall in sterling, and that was one of the positions we carried,” Soros told reporters in Davos. Below $1.40, “it seemed to me the risk-reward was no longer clear,” he said.
Brazil’s real gained as much as 2.6 percent to 2.2837 per dollar, the strongest level in more than two weeks, and the Norwegian krone appreciated 1.4 percent to 6.6814 on reduced demand for the safety of the world’s reserve currency.
The FDIC, chaired by Sheila Bair, may manage a planned operation that would buy debt clogging banks’ balance sheets, two people familiar with the matter said. The “bad bank” initiative may allow the government to rewrite some of the mortgages that underpin bad debt.

Yen Versus Aussie 

The yen dropped 2.2 percent to 60.17 versus the Australian dollar and 3.1 percent to 39.19 against the real on speculation U.S. efforts to end the credit crisis will encourage investors to resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.1 percent target lending rate compares with 4.25 percent in Australia and 12.75 percent in Brazil.
The Standard & Poor’s 500 Index increased 2.5 percent on the plan to contain toxic debt, while the Dow Jones Stoxx 600 Index added 3.2 percent.

Investors should use any weakness in the dollar and yen as an opportunity to buy because the financial crisis will persist, some traders said.

“The broad trend hasn’t changed,” said Lane Newman, director of currency trading at ING Financial Services Corp. in New York. “It’s not the time to rush out to take risk.”
The yen gained 7 percent versus the euro this month, following a 29 percent appreciation last year. Japan’s currency was up 1.1 percent against the dollar in January after a 23 percent gain in 2008. The dollar advanced 5.8 percent versus the euro this month, extending a 4.4 percent rally in 2008.
U.S. Treasury Secretary Timothy Geithner’s call for China to loosen restrictions on its currency drew criticism in Davos.
Allowing the yuan to strengthen would be “economic suicide” during an economic slump, Stephen Roach, chairman of Morgan Stanley Asia Ltd., told a panel at the forum.
China’s yuan increased 0.1 percent to 6.8443 per U.S. dollar today.


To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Molly Seltzer in New York at mseltzer4@bloomberg.net
Last Updated: January 28, 2009 12:22 EST