Dollar Trades Near One-Week Low as Stocks Drop, Oil Increases

By Kosuke Goto and Cordell Eddings
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Aug. 20 (Bloomberg) -- The dollar traded near a one-week low versus the yen on speculation credit market losses at financial firms will deepen, reducing demand for higher-yielding assets funded by loans in Japan.

The U.S. currency may also weaken against the euro for a third day as U.S. stocks fell and crude oil prices rose, raising concern the U.S. economic slowdown will be prolonged. The British pound traded near a two-year low against the dollar on speculation the Bank of England will say today in minutes of its last policy meeting that it expects inflation to slow, adding to the case for interest-rate cuts.

``The present U.S. credit market turmoil won't settle down any time soon,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``Rising oil prices also weigh on the dollar. I am a dollar-bear.''

The dollar traded at 109.67 yen at 8:45 a.m. in Tokyo, from 109.72 in New York yesterday. The U.S. currency was at $1.4786 per euro from $1.4776 yesterday, when it touched $1.4631, the strongest level since Feb. 20. The euro traded at 162.16 yen from 162.13 yesterday, when it fell to 160.87, the lowest since May 13. The U.S. currency may fall to 109.10 yen and $1.4850 a euro today, Saito forecast.

The pound was at $1.8676 from $1.8670 yesterday. It slipped to $1.8512 on Aug. 15, the lowest level since July 2006.

JPMorgan Chase & Co., the third-largest U.S. bank, predicts the Bank of England will lower its benchmark 5 percent interest rate as early as November, a change from its previous estimate of February 2009.

Relative Strength

The dollar has gained 7.8 percent versus the euro since touching the all-time low of $1.6038 on July 15 and appreciated 1.7 percent this month against the yen as economies in Europe and Japan shrank and crude oil fell more than 20 percent from its record of $147.27 a barrel.

The 14-day relative strength index of the euro against the dollar was at 24.16 today. A reading below 30 suggests the euro is due for a rebound.

``It just doesn't have enough ammunition to fuel a further dollar rally,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

Crude oil rose for a second day, trading at $114.96 a barrel, on speculation U.S. inventories fell. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they move in lockstep.

The Standard & Poor's 500 Index dropped 0.9 percent yesterday.

Lehman and AIG

Lehman Brothers Holdings Inc., the largest underwriter of mortgage bonds before the subprime market collapsed, may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase & Co. analysts said Aug. 18. Goldman Sachs Group Inc. said yesterday it's ``increasingly likely'' American International Group Inc., the biggest U.S. insurer by assets, will have to raise more capital.

U.S. housing starts fell in July to an annual rate of 965,000, the lowest since March 1991, the Commerce Department said yesterday. Producer prices gained 9.8 percent in July from a year earlier, the biggest advance since 1981, the Labor Department reported.

These ``numbers highlight stagflation risk,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The market has run ahead of itself, but I think any recovery of the euro back toward $1.50 is going to be slow going.''

Fed Rate Outlook

Futures on the Chicago Board of Trade show a 20 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by its Dec. 16 meeting, down from 37 percent odds a week earlier. Policy makers next meet Sept. 16.

The U.S. economy may face a persistent acceleration in inflation as higher food and energy prices prompt companies to pass on cost increases, Dallas Fed President Richard Fisher said in a speech in Aspen, Colorado yesterday. He said it's ``too early'' to assess the impact of a resurgent dollar on inflation.

Europe's gross domestic product shrank 0.2 percent in the second quarter, after growing 0.7 percent in the first three months of the year, the European Union's statistics office said last week in Luxembourg.

The yield on two-year U.S. Treasury notes was 1.68 percentage points less than that of comparable-maturity German bunds yesterday. The spread has widened for a five day.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net