Dollar Falls Against Euro, Yen on Widening Bank-Loss Concern

By Kim-Mai Cutler and Kosuke Goto

July 28 (Bloomberg) -- The dollar fell from near a three- week high against the euro and declined from its strongest in a month versus the yen on concern U.S. credit losses will widen.

The currency dropped a second day against the euro after Gary Stern, president of the Federal Reserve Bank of Minneapolis, was cited by the Financial Times as saying the U.S. credit crunch will worsen. The dollar also declined as the price of crude oil rose, rebounding from a seven-week low. The British pound fell against all 16 major currencies after a report showed U.K. house values dropped the most in at least seven years.

``There are still problems in the U.S. financial sector,'' said Antje Praefcke, a currency strategist in Frankfurt for Commerzbank AG, Germany's second-biggest lender. ``We're seeing a retracement of last week's strong gains in the dollar.''

The dollar fell to $1.5739 per euro as of 10:54 a.m. in London, from $1.5709 in New York last week. It slid to 107.73 yen, from 107.84 after earlier rising to 108.07, the strongest since June 26. The euro was at 169.50 yen, near a record 169.96 set July 23, compared with 169.40 at the end of last week.

The dollar may end the quarter at $1.58, Praefcke said.

The U.S. Congress last week sent President George W. Bush legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, its most sweeping effort to halt the biggest housing slump since the Great Depression in the 1930s. President Bush will sign the measure into law, a spokesman said.

The British pound fell after Hometrack Ltd, a London-based research company, said U.K. house values dropped in July by 4.4 percent from a year earlier. The British currency weakened to 79.24 pence, from 78.87 pence at the end of last week. It was at $1.9862, from $1.9916.

Yuan, Aussie

The Chinese yuan fell 0.2 percent to 6.8345 per dollar after the Communist Party's Politburo said on July 25 growth and inflation are both priorities, fueling speculation the government will curb currency appreciation to aid exporters. The yuan has strengthened 7 percent this year, the most among Asia's 10 most-traded currencies outside Japan.

The Australian dollar was at 95.88 U.S. cents from 95.63 on July 25. It earlier fell to an almost three-week low of 95.27 cents after Australia & New Zealand Banking Group Ltd., the nation's fourth-biggest bank by market value, joined National Australia Bank Ltd., the largest by assets, in warning of increased provisions for non-performing loans.

Weaker Aussie

Six months after correctly identifying the Australian dollar as one of the best bets in the foreign-exchange market, Daiwa Asset Management Co., the biggest investor in the nation's debt, predicts the rally is coming to an end.

Daiwa, which holds 4 percent of the government's bonds, expects the currency to close the year at $1, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 21 percent by 2009.

The U.S. dollar may decline as falling home prices and employment make it difficult for the Federal Reserve to raise interest rates.

Price Index

Home prices in the S&P/Case-Shiller index fell by 16 percent in May from a year ago, the most on record, according to a Bloomberg News survey before the release tomorrow. U.S. nonfarm payrolls fell by 75,000 in July, following a decline of 62,000 in June, according to a separate survey. The Labor Department will release the data on Aug. 1.

``Data on housing and payrolls pose downside risks to the dollar,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Given the state of the housing market, you can't be overly optimistic on the U.S. economy. That makes it almost impossible for the Fed to raise rates.''

The dollar may fall to 106 yen this week, he said.

Futures on the Chicago Board of Trade show a 93 percent chance the Fed will keep borrowing costs on hold at 2 percent when it announces its next decision on Aug. 5, up from 64 percent a month ago.

U.S. GDP

U.S. gross domestic product expanded an annualized 2.3 percent in the second quarter, faster than 1 percent growth in the previous quarter, according to a Bloomberg News survey. The government will release the data on July 31.

Consumer spending accelerated to a 1.5 percent gain in the quarter, the survey shows, as the U.S. handed out tax rebates to support the economy. As of yesterday, the government had already distributed almost 80 percent of the more than $100 billion in tax rebates, Treasury figures show.

``Any dollar gains after the GDP report are likely to prove temporary,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader, in a research note today. ``Growth due to fiscal stimulus is a one-off that will fade away in the second half of the year.''

The euro fell versus the yen after an industry report today showed consumer confidence in Germany dropped to the lowest in more than five years as soaring energy prices sapped purchasing power.

GfK AG's index for August, based on a survey of about 2,000 people, declined to 2.1, the lowest since June 2003, from a revised 3.6 in July, the Nuremberg-based market-research company said in a statement today. Economists predicted the gauge would fall to 3.5 from an initial July estimate of 3.9, according to the median of 25 estimates in a Bloomberg News survey.

``The European economy is facing a major setback,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America in Tokyo, wrote in a research note today. ``The markets cannot price in an ECB rate hike any more. We are recommending euro- selling against the dollar.''

Europe's single currency may fall to $1.54 against the dollar by the end of September, she said.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net