Dollar Trades Near All-Time Low Versus Euro on Slowing Economy

By Ron Harui and Kosuke Goto

Sept. 13 (Bloomberg) -- The dollar traded near an all-time low versus the euro on signs U.S. economic growth is slowing, suggesting an interest-rate advantage over Europe will narrow.

The currency is poised for the longest losing streak since October 2004 as investors increase bets the Federal Reserve will reduce its target rate next week. Faster wage growth signaled borrowing costs in Europe may rise, while a U.S. government report today will probably show higher unemployment claims.

``The dollar is likely to continue falling with the potential rate cut in the U.S.,'' said Jonathan Cavanagh, a strategist at Westpac Banking Corp. in Sydney. ``The European Central Bank has a tightening bias, which puts them at a favorable differential to the U.S.''

The dollar traded at $1.3901 per euro at 9 a.m. in London from $1.3904 late in New York yesterday, when it declined to a record low of $1.3914. The dollar bought 114.46 yen from 114.25 yen and was at $2.0268 versus the British pound from $2.0291.

The U.S. currency may extend this month's 2 percent decline versus the euro as the Labor Department will probably report in Washington today initial jobless claims rose by 7,000 to 325,000 in the week ended Sept. 8, according to a Bloomberg News survey of economists.

Interest-rate futures show 74 percent odds the Fed will lower borrowing costs half a percentage point to 4.75 percent. A month ago, traders expected a quarter-point cut.

The dollar also may weaken after ECB council member Guy Quaden told the De Tijd newspaper in an interview that the subprime-mortgage crisis may have ``negative consequences' on the U.S. economy.

``The subprime loan problem is the main worry for investors,'' said Xing Wei, a currency dealer at Shinsei Bank Ltd. in Tokyo. ``The dollar may be sold'' to $1.3950 per euro and 114.00 yen today, she said.

Japanese Mutual Funds

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 U.S. subprime mortgage assets.

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.

`Constant Capital Outflows'

``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 81.52 against New Zealand's dollar from 79.91 a week ago. It also was at 96.21 versus Australia's dollar from 95.66 on Sept. 6 and at 231.95 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.

The euro may climb to a record against the dollar for a second day on speculation ECB council member Yves Mersch will reiterate policy makers' concern that inflation will accelerate. He speaks at 9 a.m. in Luxembourg.

ECB Rate Bets

Traders added to bets the ECB will raise interest rates to curb rising prices as crude oil advanced to a record high yesterday on concern storms in the Gulf of Mexico and the Atlantic will disrupt output.

``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's hawkish, so rates are likely to go up. The euro is heading higher'' to $1.3950 and 159.50 yen today, he said.

The euro may gain for a fourth day versus the yen, the longest run since July 9, after ECB council member Erkki Liikanen said yesterday there's a risk inflation will accelerate as the region's economy continues to expand.

Crude oil for October delivery was at $79.76 a barrel today after the contract reached $80.18 yesterday, its highest intraday price since trading began in 1983.

The implied yield on the December Euribor futures contract was at 4.55 percent today, up from 4.54 percent yesterday. 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.


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