Dollar Trades Near Record Low as U.S. Banks May Report Losses

By Stanley White and Kosuke Goto

July 16 (Bloomberg) -- The dollar traded near a record low against the euro on speculation U.S. banks will report further losses this week, eroding confidence in the financial system of the world's largest economy.

The U.S. currency was also near a six-week low versus the yen before quarterly earnings from Wells Fargo & Co., Merrill Lynch & Co., JPMorgan Chase and Citigroup Inc. that may show banks are losing more money after the U.S. subprime mortgage collapse. Federal Reserve Chairman Ben S. Bernanke yesterday abandoned his view that economic risks had diminished as regulators announced plans of a rescue for Freddie Mac and Fannie Mae, the two largest buyers of U.S. mortgages.

``Dollar selling will continue for some time,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Bank earnings will likely highlight that the U.S. financial system isn't stable. A protracted downturn in U.S. economic growth is all but unavoidable.''

The dollar traded at $1.5910 per euro at 10:11 a.m. in Tokyo, after touching $1.6038 yesterday, the weakest since the 15-nation currency's 1999 debut. The dollar bought 104.80 yen, after reaching 104.16 yesterday, the lowest since June 3. Japan's currency traded at 166.74 per euro from 166.65. The dollar may fall to $1.5920 per euro and 104.40 yen today, Soma forecast.

The Australian dollar bought 98.06 U.S. cents, near a 25- year high of 98.49 cents, on speculation Reserve Bank of Australia Governor Glenn Stevens will indicate in a speech today he plans to keep interest rates at a 12-year high of 7.25 percent.

Bank Earnings

Wells Fargo, the second-biggest U.S. mortgage lender, reports quarterly earnings later today. JPMorgan Chase and Merrill announce results tomorrow, while Citigroup, the biggest U.S. bank, publishes its on July 18.

Global banks and securities firms have reported losses of about $400 billion due to rising defaults on mortgages for U.S. homeowners with poor credit, according to Bloomberg data.

In testimony before the Senate Banking Committee yesterday, Bernanke abandoned his June assessment that the threat of an economic downturn has diminished, telling lawmakers that growth and inflation risks are increasing. Treasury Secretary Henry Paulson told the panel that the government would buy shares in Fannie and Freddie ``only if necessary.'' Bernanke speaks again before the House Financial Services Committee at 10 a.m. in Washington today.

More Bearish

``Bernanke has become a bit more bearish on the U.S. economy than before,'' said Yuji Kameoka, a senior economist and currency analyst in Tokyo at Daiwa Institute of Research, a unit of Japan's second-largest brokerage. ``This reduces expectations for a Fed rate increases this year and is currently weighing on the dollar.''

The U.S. currency may move between 104 yen and 106 yen, and $1.58 and $1.60 a euro this week, he said.

Federal funds futures on the Chicago Board of Trade show a 5 percent chance that the Fed will increase the 2 percent target lending rate at its Aug. 5 meeting, compared with 77 percent odds a month ago.

Dollar Index

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, fell for a sixth day, dropping 0.2 percent to 71.73.

The U.S. currency has given up most of the gains made versus the euro since July 3, when European Central Bank President Jean-Claude Trichet said he had ``no bias'' on future interest-rate moves. The dollar strengthened 0.6 percent to $1.5706 per euro that week. It has since slumped 1.2 percent on concern that losses at Fannie Mae and Freddie Mac will deepen.

U.S. consumer prices probably rose at an annual rate of 4.5 percent in June, the most since September 2005, according to the median forecast of 35 economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. New York time.

``Consumer price data aren't likely to support the dollar,'' Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``It will serve as a reminder that the U.S. faces stagflationary risks, making it difficult to conduct monetary policy.''

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