Dollar Falls on U.S. Manufacturing Slump, Credit-Market Losses

By Kosuke Goto and Ron Harui

Aug. 21 (Bloomberg) -- The dollar fell the most in more than a month against the yen on speculation a manufacturing industry contraction and credit-market losses will prompt the Federal Reserve to hold off from raising interest rates.

The U.S. currency also slid against the euro on concern futures traders will pare bets on gains in the dollar, which has strengthened against all 16 of the most-active currencies this month. The yen climbed against the euro as faltering global growth and falling Asian stocks prompted traders to pare holdings of higher-yielding assets funded in Japan.

``U.S. credit concerns seem to be causing investors to become risk averse,'' said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``These worries are fueling buying of the yen.''

The dollar fell 1 percent to 108.80 yen, the most since July 15, as of 7:31 a.m. in London from 109.86 in New York yesterday. It also declined to $1.4793 per euro from $1.4747, reaching a one-week low of $1.4812. The yen gained to 161.12 per euro from 162.03, approaching a three-month high of 160.87 reached on Aug. 19.

The dollar may fall to $1.50 per euro in a few days should it weaken below $1.48, Iguchi forecast.

Gains in the yen accelerated after it rose above 109.50 and 109.20 against the dollar and 161.50 per euro, where traders had orders to buy the currency, said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way.

Credit-Market Losses

The MSCI Asia Pacific Index lost 0.6 percent to 122.60 after the Financial Times reported Lehman Brothers Holdings Inc. was unable to reach stake sale agreement with South Korean and Chinese investors.

The Fed Bank of Philadelphia's general economic index, due at 10 a.m. in New York, will be minus 12.6 in August, from minus 16.3 in July, according to a Bloomberg News survey of economists. Readings less than zero signal a decline in manufacturing and that would be the longest contraction since 2001.

Futures on the Chicago Board of Trade show an 18 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- point by its Dec. 16 meeting, down from 34 percent odds a week earlier. Policy makers next meet Sept. 16.

Carry Trades Reduced

Japan's currency rose to 95.15 per Australian dollar, from 95.03 yesterday in New York. It climbed to 77.82 per New Zealand dollar from 78.33.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread. The risk is currency moves erase the profits.

Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 8 percent in New Zealand and 7.25 percent in Australia.

South Korea's won fell 0.2 percent to 1,051.90 per dollar on speculation overseas funds are repatriating money as they cut their holdings of local stocks.

Dollar Bets

The U.S. currency has gained 7.7 percent versus the euro since touching an all-time low of $1.6038 on July 15 and appreciated 1.6 percent this month against the yen. The greenback advanced as reports showed the European and Japanese economies shrank in the second quarter and crude oil fell more than 20 percent from the record $147.27 a barrel reached July 11.

Futures traders are betting for the first time since March 2007 that the dollar will rise against the euro, yen and British pound. There were 24,060 more wagers by hedge funds and other large speculators on a gain in the dollar than on a decline on Aug. 12, data from the Washington-based Commodity Futures Trading Commission showed Aug. 15. A week earlier there were 20,886 more bets on dollar weakness.

``The dollar has been recently heavily overbought despite deteriorating U.S. economic fundamentals,'' said Keiichi Iguchi, a currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by market value. ``Weaker economic data could spark sharp dollar-selling'' as traders unwind their positions, he said.

The 14-day relative strength index of the euro against the dollar was at 25.5, having been below 30 since Aug. 8. A reading below 30 signals Europe's single currency may strengthen.

`Kind of Scary'

Crude oil today increased 0.7 percent to $116.36 a barrel. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations based on their value changes. A reading of 1 would mean they move in lockstep.

The British pound traded close to a two-year low versus the dollar as minutes of the Bank of England's August meeting indicated expectations for the U.K. economy worsened.

The pound traded at $1.8646 from $1.8621 yesterday. It reached $1.8512 on Aug. 15, the lowest level since July 2006. BOE policy makers split three ways when they kept the target lending rate unchanged at 5 percent, minutes of the Aug. 7 meeting showed yesterday. Seven policy makers voted for the move, while one official called for an increase and another for a cut.

Gains in the euro were limited as Germany's Economy Ministry yesterday said the economic outlook has worsened even beyond the second quarter, when gross domestic product shrank for the first time in four years.

The dollar has traded in a range of $1.46 to $1.48 per euro this week after advancing for five consecutive weeks, the longest stretch of gains since February 2006.

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