Dollar Trades Near 2-Week Low Before Bernanke, Paulson Testify

By Kosuke Goto and Stanley White

July 15 (Bloomberg) -- The dollar traded near a two-week low against the yen before Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson address U.S. lawmakers on their response to widening credit-market losses.

The currency fell to a 25-year low versus the Australian dollar on speculation losses at Fannie Mae and Freddie Mac will deepen even after the U.S. government pledged support for the two-largest buyers of home loans. Gains in the yen may be limited by speculation the Bank of Japan will keep interest rates unchanged at 0.5 percent today, the lowest among major economies, eroding the allure of yen-denominated assets.

``The situation in the U.S. financial sector has become very serious,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo, France's second-largest bank by market value. ``Even if Bernanke and Paulson announce possible support measures, it's not easy to buoy the dollar.''

The dollar traded at 106.12 yen at 9:35 a.m. in Tokyo from 106.14 yen in New York yesterday. It was also at $1.5896 per euro from $1.5908 in New York. It dropped last week to within a cent of the record low of $1.6019 reached April 22. The yen traded at 168.68 per euro from 168.89 yesterday, when it fell to 169.75, the lowest since the 15-nation currency debuted in 1999.

The U.S. currency may fall to 105 yen and $1.5950 a euro today, Saito forecast.

Against Australia's currency, the U.S. currency fell to 97.36 cents, the lowest level since 1983, before trading at 97.20 cents, compared with 96.85 cents in late Asian trading yesterday.

The Bank of Japan will keep the benchmark overnight lending rate unchanged today, according to all 39 economists surveyed by Bloomberg News. Governor Masaaki Shirakawa will hold a press conference in Tokyo at 3:30 p.m.

100 Yen

The yen may rise as high as 100 per dollar this year as the Bank of Japan is more likely to raise interest rates than the Federal Reserve, said Toyoo Gyohten, former currency-policy chief at Japan's Ministry of Finance.

The Bank of Japan may lift borrowing costs should inflation accelerate and the economy sustain growth of at least 1 percent, Gyohten said.

``The Fed is most likely to maintain its current level of interest rates,'' Gyohten, president for the Institute of International Monetary Affairs in Tokyo, said in an interview yesterday. ``The BOJ is more likely to raise rates. The medium- term trend is for a weaker dollar and a stronger yen.''

`Tangible Actions'

U.S. stocks fell yesterday, led by financial shares, after the government's seizure of Pasadena, California-based IndyMac Bancorp Inc. and predictions of wider credit losses overshadowed Paulson's pledge to shore up Fannie and Freddie. The Standard & Poor's 500 Index declined 0.9 percent.

Bernanke will give his semiannual testimony on monetary policy and the economy before the Senate Banking Committee at 10 a.m. Washington time.

``Bernanke will avoid saying anything that could potentially weaken confidence in the dollar,'' said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ``But the reality is the U.S. housing market and credit squeeze haven't hit bottom yet. That's discouraging investors from holding dollar assets.''

The U.S. currency may fall to 105.50 yen today, he said.

Global banks and securities firms have reported losses of about $400 billion as the subprime-mortgage market collapsed.

Dollar Index

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, traded at 71.990 today from 71.915 yesterday.

``The market is clearly concerned about a round of mortgage and regional bank failures in the U.S. in the coming months,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``People want to see the congressional plan to help Fannie and Freddie come together before they ratchet up risk appetite.''

Any gains in the euro may be limited on speculation investor confidence in Germany, Europe's largest economy, fell to an almost 16-year low, weakening the case for higher rates.

The ZEW Center for European Economic Research in Mannheim will say its index of investor and analyst expectations fell to minus 55 in July from minus 52.4 in the previous month, according to a Bloomberg News survey. The ZEW will release the data today.

`Euro is a Sell'

``We're seeing the euro zone economy beginning to slow,'' Greg Salvaggio, vice president of capital markets at Tempus Consulting Inc. in Washington, said in a Bloomberg Television interview. ``Longer run, the euro is a sell. We remain bullish on the dollar and we're looking for levels year-end close to $1.35 to $1.40.''

Losses in the dollar may be limited by speculation reports will show inflation accelerated, spurring traders to add to bets the Fed will raise its benchmark interest rate from 2 percent.

U.S. producer prices increased 8.7 percent from a year earlier in June, the most since 1981, according to a Bloomberg News survey of economists before a Labor Department report due today. A report tomorrow will show consumer prices rose 4.5 percent in June, the most since September 2005, according to a separate survey.

-- With reporting by Ron Harui in Singapore and Catherine Yang in Hong Kong. Editor: Sandy Hendry, Chris Young

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