Dollar Declines to All-Time Low Versus Euro on Slowing Economy

By Lukanyo Mnyanda and Ron Harui

Sept. 13 (Bloomberg) -- The dollar fell to an all-time low against the euro on speculation signs of slowing U.S. economic growth will prompt the Federal Reserve to cut interest rates, reducing the appeal of assets denominated in the U.S. currency.

The dollar is poised for the longest losing streak since October 2004 as investors increase bets the Fed will cut its target rate on Sept. 18. A government report today will probably show U.S. jobless claims rose this month. The euro also gained as a report showed inflation in France, the second-largest of the 13 economies sharing the currency, quickened last month.

``We're still in a weak dollar environment,'' said Mitul Kotecha, head of currency strategy at Calyon in London. ``Concerns about the U.S. economy have intensified and that's played negatively for the dollar.''

The dollar was at $1.3906 per euro at 11:08 a.m. in London from $1.3904 in New York late yesterday after trading at a record low of $1.3927. The dollar bought 114.68 yen from 114.25 yen and was at $2.026 versus the British pound from $2.0291.

The Labor Department in Washington will say initial jobless claims rose by 7,000 to 325,000 in the week ended Sept. 8, according to a Bloomberg News survey of 43 economists. That may cause investors to raise bets the Federal Open Market Committee will trim the main lending rate next week from 5.25 percent.

``The focal point for investors remains the FOMC meeting next week,'' said Kamal Sharma, a currency strategist at Bank of America in London. ``The bias remains for a weak dollar.''

Rate Cut Expectations

Interest-rate futures show 74 percent odds policy makers will lower borrowing costs half a percentage point to 4.75 percent. A month ago, traders expected a quarter-point cut. The equivalent rate in the euro zone is 4 percent.

Investors have this week increased bets the European Central Bank will increase its key rate this year after the bank vowed to keep ``upside'' inflation risks at bay. A report today showed prices in France rose by the most in four months.

``The medium-term outlook for price stability remains subject to upside risks,'' the Frankfurt-based ECB said in its monthly bulletin published today. ``By acting in a firm and timely manner, the governing council will ensure that risks to price stability over the medium term do not materialize.''

ECB council member Guy Quaden told the De Tijd newspaper in an interview that a squeeze on credit caused by concern over losses linked to U.S. subprime mortgages may have ``negative consequences'' on the U.S. economy.

Banks and companies are seeking to refinance about $700 billion of commercial paper in the U.S. currency this week, analysts led by Michael Hart at Citigroup Inc. wrote in a research report on Sept. 11. Borrowers in the commercial paper market are struggling to sell new notes because of concern some of the short-term debt is linked to subprime-mortgage assets.

Euribor Futures

The implied yield on the December Euribor futures contract has risen 8 basis points since the end of last week and was at 4.53 percent today. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 18 basis points above the ECB's key rate since 1999.

``Oil is surging, so there's an upside risk to inflation in Europe,'' said Hideaki Inoue, chief manager of derivatives and fixed-income investment at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The ECB is hawkish, so rates are likely to go up.'' The euro may rise to $1.3950 and 159.50 yen today, he said.

Crude for October delivery was at $79.80 a barrel on the New York Mercantile Exchange at 9:37 a.m. in London, after yesterday rising above $80 a barrel for the first time. Higher prices may increase import prices in the $10.4 trillion euro- zone economy and increase pressure on the ECB to raise rates.

Yen Weakens

The yen weakened as Japanese investors put money into more than 2.4 trillion yen ($21 billion) of mutual funds marketed this month to lure investment in overseas assets, according to data compiled by Bloomberg.

New Zealand's central bank left its key rate at a record- high 8.25 percent today, as predicted by all 14 economists surveyed by Bloomberg, pushing the yield spread with two-year Japanese bonds to 6.05 percentage points from 6.01 percentage points yesterday. The Bank of Japan's key overnight lending rate of 0.5 percent is the lowest among major economies. The benchmark rate is 6.50 percent in Australia and 5.75 percent in the U.K.

``The speed may have slowed, but there are constant capital outflows by Japanese retail investors related to investment trust funds,'' said Junya Ota, who oversees the equivalent of about $7 billion at Mitsubishi UFJ Asset Management Co., a unit of Japan's largest lender. ``This is stemming the yen's appreciation.''

The yen traded at 82.06 against New Zealand's dollar from 79.91 a week ago. It also was at 96.65 versus Australia's dollar from 95.66 on Sept. 6 and at 232.22 a British pound from 231.84 yesterday. It may fall to 117 per U.S. dollar by year-end, Ota forecast.

Japanese investors bought 1.4 trillion yen more foreign bonds than they sold during the week ended Sept. 8, the most since October 2005, according to figures based on reports from designated major investors released today by the Ministry of Finance in Tokyo.

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