Dollar Declines on Concern U.S. Financial Turmoil Will Increase

By Ron Harui and Theresa Barraclough

March 6 (Bloomberg) -- The dollar fell the most in a week against the euro and dropped against the yen on speculation the U.S. recession and financial turmoil will deepen, damping demand for the greenback.

The U.S. currency weakened for a second day against the yen before a Labor Department report today that economists say will show the world’s largest economy lost more jobs in February than at any time since 1949. The greenback also declined after Moody’s Investors Service said yesterday it may cut the credit ratings of the three largest U.S. banks. The euro strengthened on speculation European investors will repatriate profits before the end of the first quarter on March 31.

“A very weak employment report is likely to spur selling of the dollar,” said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan’s fifth-largest bank. “There are also worries over the U.S. banking sector.”

The dollar dropped to $1.2697 per euro as of 7:48 a.m. in London from $1.2540 late in New York yesterday. The decline was the biggest since Feb. 24. The U.S. currency slid to 97.28 yen from 98.07 yen. The euro rose to 123.64 per yen from 123.00 yesterday, and traded at 89.09 British pence from 88.82.

U.S. employers cut payrolls by 650,000 and the unemployment rate probably surged to a 25-year high of 7.9 percent, according to the median estimates in a Bloomberg News survey before the Labor Department data due at 8:30 a.m. in Washington.

Rating Outlook

JPMorgan Chase & Co., the largest U.S. bank, had its ratings outlook cut by Moody’s to negative from stable. Moody’s also said it will review the long-term debt ratings of Wells Fargo & Co., the second-largest, and Bank of America Corp., ranked third, on concern that higher credit costs will damage their capital ratios.

The euro also gained on speculation European investors will bring home overseas earnings as they close their books at the end of this quarter, amid increasing signs the global recession is deepening.

“European investors appear to be repatriating funds from abroad ahead of the quarter-end,” said Yuji Saito, head of the foreign-exchange group at Societe Generale SA in Tokyo. “They’re buying back their own currency.”

The economy of the 16 euro nations is shrinking faster than the ECB expected just three months ago as the global slowdown curbs export demand and companies cut back on workers. European Central Bank President Jean-Claude Trichet said yesterday the central bank has cut its economic forecasts again and expects inflation to stay “well below” its 2 percent ceiling this year.

Political Instability

The yen declined against 11 of the 16 major currencies on concern Japan’s political turmoil will make it harder for the government to cope with a deepening recession. Japanese prosecutors suspect a group headed by Trade Minister Toshihiro Nikai of taking illegal political donations, local media reported today.

“Political uncertainty seems to be mounting and the Japanese economy isn’t showing any signs at all of improving,” said Ryohei Muramatsu, Tokyo-based manager of Group Treasury Asia at Commerzbank AG, Germany’s second-largest lender. “The yen is likely to be sold” to 124.10 per euro today, he said.

Japan’s economic data has been “much worse” than expected and the government will need to revise its gross domestic product forecast soon, Finance Minister Kaoru Yosano said today.

Current-Account Deficit

Japan will record a current-account deficit of 15.3 billion yen ($157 million) in January, the first shortfall in 13 years, according to a Bloomberg survey of economists before the March 9 report. The world’s second-biggest economy shrank an annualized 12.7 percent last quarter, the government said Feb. 16, the biggest contraction since the 1974 oil crisis.

The yen will fall to 102 against the dollar as risk sentiment improves and a weakening domestic economy prompts investors to buy assets outside Japan, Barclays Capital said.

“The deteriorating state of both the economy and the political situation appears likely to add momentum to negative sentiment about Japanese assets,” Toru Umemoto and Yuki Sakasai, Tokyo-based strategists at Barclays, wrote in a research note yesterday. “The Japanese current account is declining, outward foreign direct investment increasing and Japanese investors continue to purchase foreign securities.”

Trade minister Nikai told reporters in Tokyo today he had no knowledge of an investigation into one of his political groups over suspected campaign donations and had done nothing wrong. Prosecutors suspect a group he headed received donations from Nishimatsu Construction Co., the Sankei newspaper reported, without saying where it got the information.

To contact the reporters on this story: Ron Harui in Tokyo at rharui@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Last Updated: March 6, 2009 02:51 EST