Dollar Heads for Weekly Gain as Banks Weather Credit Turmoil

By Stanley White and Kosuke Goto

July 18 (Bloomberg) -- The dollar headed for a weekly advance against the euro, rebounding from a record low on signs U.S. investment banks will withstand credit-market losses arising from the nation's subprime mortgage collapse.

The U.S. currency also rose versus the pound on speculation the U.K. government will boost borrowing as Chancellor of the Exchequer Alistair Darling introduces new spending guidelines. The yen was set for a weekly loss against the South African rand as a rally in U.S. stocks following JPMorgan Chase & Co.'s better-than-expected earnings encouraged so-called carry trades.

``The dollar is getting a boost as the markets correct excessive pessimism about the U.S. financial sector,'' said Joseph Kraft, head of capital markets in Tokyo at Dresdner Kleinwort, an investment bank owned by Germany's Allianz SE. ``The financial turmoil, shown by a sharp decline in stocks, was given a reprieve at least. Major Wall Street investment banks can survive.''

The dollar rose to $1.5855 per euro at 2:28 p.m. in Tokyo from $1.5863 late yesterday and $1.5938 at the end of last week. It hit an all-time low of $1.6038 on July 15. The currency was at 106.26 yen from 106.28 yen, little changed from a week ago.

Against the euro, the yen traded at 168.49 from 168.58 yesterday and 169.46 on July 11. The dollar may rise to 110 yen by the end of September, Kraft said.

The pound dropped to 79.36 pence per euro, from 79.16 yesterday, and to $1.9992 from $2.0038. The Financial Times reported, without citing sources, that the U.K. government's new spending rules would allow it to break limits on public sector debt. A Treasury spokesman said the report was pure speculation.

Weaker Yen

The yen fell 1.4 percent this week to 14.0800 against the South African rand. It also declined 0.6 percent to 103.28 per Australian dollar and weakened by 0.3 percent versus the New Zealand dollar to 81.12.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan held its target lending rate at 0.5 percent this week, the lowest among major economies. Benchmark rates are 12 percent in South Africa, 7.25 percent in Australia and 8.25 percent in New Zealand. The Standard & Poor's 500 Index increased 1.2 percent yesterday.

``Currency traders are likely to take their cue from the stock market,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Earnings season isn't as bad as many had feared. There will be some pressure on the yen to weaken.''

The yen may decline to 107 per dollar today, Ishikawa forecast.

Bank Earnings

Profit at JPMorgan, the largest U.S. bank by market value, fell 52 percent on mortgage-related writedowns and costs from the takeover of Bear Stearns Cos. Second-quarter net income of 54 cents a share compared with expectations for 44 cents in a Bloomberg survey of analysts.

Citigroup Inc. reports quarterly earnings later today. Wells Fargo & Co., the second-biggest U.S. mortgage lender, on July 16 announced profit that beat analyst estimates. Merrill Lynch & Co., the third-biggest U.S. securities firm, fell after it yesterday reported a fourth straight quarterly loss.

The S&P index lost 3.8 percent in the seven trading days ended July 15, the day the dollar reached its worst level against the euro, on speculation a government plan to shore up Fannie Mae and Freddie Mac would fail to restore confidence in the two largest buyers of U.S. home loans.

More Confidence

``We were extremely bearish,'' said Alan Kabbani, senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``Now the market is taking some of that bearishness out and becoming a little more confident about the economy and the financial sector.''

The dollar pared its gains today after the Wall Street Journal reported Freddie Mac may raise as much as $10 billion by selling new shares. The article cited unidentified people familiar with the situation.

``The Freddie Mac story will likely add to risks of a softer U.S. equity open,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender. ``And thus a softer U.S. dollar.''

Global banks and securities firms have reported losses and writedowns of $436 billion related to subprime loans to U.S. homeowners with poor credit, weighing on both stocks and the nation's currency this year.

Still, cheaper oil is helping support the greenback against the euro. Crude oil for August delivery is set for a record weekly drop in dollar terms, having lost more than $14 a barrel since July 11 in New York.

The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net