Dollar Near Record Low Versus Euro Before Bernanke's Testimony

By Stanley White and Kosuke Goto

Sept. 20 (Bloomberg) -- The dollar traded near a record low against the euro before Federal Reserve Chairman Ben S. Bernanke's congressional testimony on the mortgage market.

Traders are betting the central bank will reduce borrowing costs further this year as the worst U.S. housing slump in 16 years threatens economic growth. The first interest-rate cut since June 2003 on Sept. 18 has pushed the dollar to the weakest in 15 years against an index of six major currencies that includes the Japanese yen and British pound.

``We're going to see a continuation of U.S. dollar weakness against the euro,'' said Greg Gibbs, a currency 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 traded at $1.3976 per euro at 11:05 a.m. in Tokyo from $1.3957 late in New York yesterday. It reached a record low of $1.3988 on Sept. 18 after the Fed's rate decision and will end the year around $1.42, Gibbs forecast. The dollar was at 115.90 yen from 116.10 yesterday.

The dollar has lost 5.6 percent this year versus the single European currency as credit losses tied to U.S. subprime mortgages put pressure on Fed policy makers to lower interest rates by half a percentage point to 4.75 percent. The European Central Bank's benchmark is 4 percent.

Bernanke's Testimony

Bernanke will testify 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 October meeting.

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.

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

Saudi Arabia

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 would stoke 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.''

The euro may advance to $1.3988, the record high reached Sept. 18, and to 162.44 yen today, Waddington said.

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.

Dollar Support

The New York Board of Trade's Dollar Index that also includes the euro, Swiss franc, Canadian dollar and Swedish krona, touched 79.091 yesterday, the lowest since September 1992.

The dollar's losses against the yen may be capped by speculation Japanese importers will buy it to settle accounts. Many Japanese companies close their accounts on the fifth, the 10th, the 15th, the 20th, the 25th and the last business day of every month. These days are known as ``Gotobi'' in Japanese.

``The dollar could be in for a bounce against the yen,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There seems to be demand for dollars on this settlement day.''

The dollar may rise to 116.50 yen today, he said.

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