Dollar falls to 3-year low versus yen
Analysts say the U.S. currency will continue to weaken in coming weeks
By Ye Xie and Kim-Mai Cutler
Bloomberg News
NEW YORK » The dollar fell to the lowest level in three years versus the yen and touched the weakest ever against the euro after the Federal Reserve signaled the currency's decline may be helping the U.S. economy.
The U.S. currency dropped below 104 yen, to its cheapest level since March 2005, as a report showed Chicago-area business shrank this month, fueling bets on a bigger Fed interest-rate cut in March. Fed Chairman Ben S. Bernanke said yesterday the depreciating currency helps cut the trade deficit.
"It's broad dollar weakness because of concerns about the U.S. economy, U.S. yields, expectations of rate cuts and financial markets," said Tom Fitzpatrick, global head of currency strategy at Citigroup Inc. in New York. "They don't care about the weak dollar. I absolutely believe the market is disappointed" by Bernanke's comment.
The dollar fell as low as 103.69 yen, then settled at 103.74 yen, from 105.37 late yesterday and 107.17 a week ago. Today's drop was the biggest since Jan. 2. It touched $1.5239 per euro, the weakest since the euro's inception in 1999. It then traded at $1.5179, from $1.5193 yesterday. The dollar will weaken to $1.55 in coming weeks, Fitzpatrick said.
The U.S. currency lost 2.1 percent against the euro this month, the most since September. The euro is 30 percent above its debut level of about $1.17 in 1999, and is up 84 percent from an all-time low of 82.30 U.S. cents in 2000.
Latin American currencies also surged this week, with Brazil's real reaching the highest in almost nine years.
The yen gained against all 16 most-active currencies today. The yen rose 1.65 percent to 157.46 per euro, the largest gain in five weeks, from 160.10 yesterday as investors exited so-called carry-trade bets on higher-yielding assets funded with cheap loans in Japan.
While Treasury Secretary Henry Paulson reiterated yesterday he favors a strong dollar and President George W. Bush said the currency should reflect the economy's "fundamentals," Bernanke told a Senate panel the declines have resulted in "some improvement" in the trade deficit, which "is a positive."
"The Fed is breaking new ground in expressing indifference to the U.S. dollar's decline," Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co., wrote in a research note today. Merrill forecasts the euro to "peak" at $1.57 around the end of March.
The U.S. currency's decline has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation's trade deficit last year for the first time since 2001. It can also make it less attractive to hold onto U.S. assets.
Foreign holdings of U.S. stocks, notes and bonds rose a net $56.5 billion in December, slowing from an increase of $90.9 billion in November, Treasury Department data showed this month.
The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, declined to 73.56 today, the lowest since the measure's start in 1973. The dollar dropped to 3.1845 versus Malaysia's ringgit and 28.88 Thai baht, both the weakest in more than a decade, on speculation U.S. rate cuts will prompt fund managers to shift investment into Asia.
Japan's currency climbed 3.4 percent to 96.56 per Australia's dollar, 3.4 percent to 82.99 per New Zealand dollar and 4.9 percent to 13.26 per South Africa's rand.
The currencies are favorites for so-called carry trades, in which investors get funds in a nation with low borrowing costs and invest in one with higher rates. The risk in that strategy is that swings in exchange rates erase those profits.
Implied volatility on one-month dollar-yen options touched 14.1 percent, the highest since January, from 11.48 percent yesterday. Traders quote volatility, a gauge of expectations for currency moves, as part of pricing options. Japan's 0.5 percent benchmark rate compares with 7 percent in Australia, 8.25 percent in New Zealand and 11 percent in South Africa.
After trading between $1.43 to $1.49 per euro since November, the dollar decline gained momentum when Fed Vice Chairman Donald Kohn said on Feb. 26 that credit-market turmoil posed a "greater threat" than inflation. The comments drove the euro above $1.50 for the first time. The dollar fell past $1.51 on Feb. 27 after Bernanke told a House panel policy makers "will act in a timely manner" to support growth.
The euro also got a boost yesterday after European Central Bank President Jean-Claude Trichet said "price stability is a necessary condition" for ongoing economic expansion. The ECB next meets on March 6 to set its key rate, now at 4 percent.