Dollar Falls to Record Low Vs Euro Before Bernanke's Testimony

By Stanley White and Kosuke Goto

Sept. 20 (Bloomberg) -- The dollar fell to a record low against the euro on speculation Federal Reserve Chairman Ben S. Bernanke will tell a congressional hearing that a U.S. housing slump threatens to slow economic growth.

The U.S. dollar fell against 13 of the 16 most-active currencies as traders bet the central bank will cut its benchmark interest rate further after the first reduction since June 2003 on Sept. 18. The currency dropped to the lowest in nine years against the Indian rupee and a six-week low against the Australian dollar.

``We're going to see a continuation of U.S. dollar weakness,'' said Greg Gibbs, a strategist at ABN Amro Holding NV in Sydney. ``Bernanke will talk about the housing market and how that could flow through to the rest of the economy. The possibility of more U.S. rate cuts is completely open.''

The U.S. currency fell to a record low of $1.4005 against the euro before trading at $1.3995 as of 7:29 a.m. in London from $1.3957 late in New York yesterday. It will end the year around $1.42, Gibbs forecast. The dollar was at 115.80 yen from 116.10 yesterday.

The currency also dropped to 86.17 U.S. cents versus the Australian dollar, the highest since Aug. 9, from 85.66 in New York. It declined as much as 0.8 percent against the rupee to 39.90 per dollar, the lowest since May 14, 1998.

Bernanke's Testimony

The dollar has fallen to the weakest in 15 years against an index of six major currencies that includes the Japanese yen and British pound after Fed policy makers lowered the target for the overnight lending rate between banks by half a percentage point to 4.75 percent. The European Central Bank's benchmark is 4 percent.

Bernanke will testify on the mortgage market at 10 a.m. in Washington before the House Financial Services Committee. Futures contracts show 80 percent odds of a quarter-point cut to 4.5 percent at the Fed's next meeting on Oct. 31.

Reports today will show first-time applications for jobless claims in the U.S. rose last week and a measure of the U.S. economy's future outlook fell in August, according to separate Bloomberg News surveys.

``The Fed will cut the rate by 25 basis points to 4.5 percent,'' said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. ``Concern over the slowdown in the U.S. will cause dollar selling.''

The U.S. currency may fall to 105 yen and $1.45 per euro by year-end, Hayashi said.

Saudi Arabia

The dollar may accelerate losses against the euro on speculation Saudi Arabia will abandon its peg to the U.S. currency.

The Middle East nation failed to lower its interest rates in line with the Fed, the Daily Telegraph reported. This may pave the way for Saudi Arabia and other countries in the region to scrap their currency pegs as a weak dollar stokes inflation, the newspaper said.

``The Telegraph article is saying the Middle East might want to start selling dollars because of inflationary risk,'' said Luke Waddington, head of interbank currency sales in Tokyo at Royal Bank of Scotland Group Plc. ``Once the market reads that, the market will probably want to buy euros and see if they can move it higher.''

Defending Options

The dollar's losses may be limited against the euro on speculation investors will buy the U.S. currency to protect options that would become worthless should it weaken beyond triggers at $1.40. Investors use triggers to reduce the premium paid for currency options that grant the right to buy or sell a currency at a specific level on a predetermined date.

``Defensive dollar buying is picking up in intensity,'' said Shinichi Hayashi, foreign-exchange trader at Shinkin Central Bank in Tokyo. ``I don't think the dollar can fall very far against the euro.'' The dollar may rise to $1.39 per euro today, he said.



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