Wednesday, March 12, 2008

Dollar Declines on Speculation Fed Rescue Package Won't Succeed

By Gavin Finch

March 12 (Bloomberg) -- The dollar fell against the euro and the yen on speculation the Federal Reserve's plan to provide funds to banks won't be enough to break the gridlock in money- market lending and stem credit losses.

``Read the need for such new measures as being a symptom of what ails the world and not a panacea for its problems,'' said David Simmonds, the London-based global head of currency research at Royal Bank of Scotland Plc, the world's fourth-biggest foreign-exchange trader. ``Stay short dollars.''

The U.S. currency also declined as traders wagered the Fed will cut rates by as much as three quarters of a percentage point to prevent a recession, while the European Central Bank keeps borrowing costs unchanged. The yen advanced against the dollar and the euro after a government report showed Japan's economy grew faster than forecast in the fourth quarter.

The dollar fell to $1.5469 per euro by 7:47 a.m. in New York, from $1.5338 yesterday, when it declined to $1.5495, the weakest level since the European single currency's debut in 1999. It slipped to 102.49 per yen from 103.42 yen. The euro was at 158.59 yen from 158.61.

The U.S. currency also dropped to $2.0168 against the U.K. pound from $2.0064 before Chancellor of the Exchequer Alistair Darling delivers his first budget statement to Parliament at noon in London today.

The yen climbed as a revised Japanese government report showed gross domestic product increased an annualized 3.5 percent in the three months through December, faster than the 2.3 percent median forecast of 27 economists surveyed by Bloomberg News.

European Industry

The euro extended its gains against the dollar after a European Union report showed industrial production in the region increased for the first time in three months in January. It rose 0.9 percent from January, more than twice the rate forecast by economists surveyed by Bloomberg.

The U.S. currency was also weighed down by speculation that Gulf central bankers will consider dropping the dollar peg when they meet next week. A Qatari official denied in a telephone interview that the meeting will discuss currency revaluation.

The euro earlier gained on speculation ECB President Jean- Claude Trichet will highlight inflation risks today at a press conference with fellow policy maker Axel Weber.

The ECB's key interest rate is 1 percentage point more than the Fed's 3 percent target rate for overnight loans between banks.

Policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed yesterday on a second round of emergency-loans to curb rising money-market rates. The Fed said it will lend as much as $200 billion of Treasuries through a new lending tool and widen the collateral it accepts to include mortgage-backed securities.

`Aspirin' for Dollar

This is ``not a panacea, more like an aspirin for the dollar,'' analysts led by Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co., wrote in a research note today. ``There is a reasonable risk that this Fed move reflects the depth of their concern with U.S. asset markets, not a Fed formula to resolve U.S. asset-market difficulties.''

The euro interbank offered rate, or Euribor, for three month euro loans rose for a seventh day, climbing 1 basis point to 4.61 percent, the highest since Jan. 7, the European Banking Federation said today.

The collapse of the U.S. subprime mortgage market has caused losses and writedowns of $190 billion at the world's biggest financial institutions. Concerted action announced Dec. 12 temporarily eased the shortage of cash in money markets at the end of last year.

Bloomberg Survey

The dollar will extend its decline against most major currencies in the next six months as the U.S. economic slowdown deepens, a survey of 5,430 Bloomberg users showed.

The Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, declined to 72.72. It was at a record low of 72.462 on March 7.

The synthetic euro, which estimates the European currency's value before its inception in 1999, advanced to the strongest level since at least January 1989, when Bloomberg's data on the measure began. The euro has strengthened 17 percent against the dollar in the past year. The U.S. currency has weakened 13 percent versus the yen.

Traders bet the Fed will cut its target rate as much as 0.75 percentage point on March 18, from 3 percent, to keep the U.S. from dropping into a recession. The likelihood of a reduction to 2.25 percent was 62 percent, according to futures on the Chicago Board of Trade. The balance of bets is on a cut to 2.5 percent.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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