Dollar Falls as Bush Talks of Recession, Traders Bet on Fed Cut

By Bo Nielsen and Ron Harui

Sept. 25 (Bloomberg) -- The dollar snapped two days of gains against the euro after President George W. Bush said the U.S. may face a ``painful'' recession and as traders bet on a Federal Reserve interest-rate cut next month.

The dollar also weakened versus the Swiss franc before a U.S. government report today that may show home sales dropped in August, extending the worst housing slump in 17 years. The British pound rose against the U.S. currency after policy maker Andrew Sentance said the Bank of England must temper its response to the credit crisis and stick to its inflation focus.

``The prospects of loose fiscal and monetary conditions in a economy that's slowing rapidly is hitting the dollar, said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``The bailout package may restore confidence in a lot of things but it won't restore confidence in the dollar.''

The dollar fell to $1.4718 per euro as of 8:46 a.m. in London, from $1.4621 yesterday. The currency declined to 105.70 yen from 106.11. The euro was at 155.62 yen from 155.15. The U.S. currency dropped to $1.8608 against the pound from $1.8465, and to 1.0815 versus the franc from 1.0916.

Futures contracts on the Chicago Board of Trade showed 80 percent odds the Fed will cut borrowing costs in October as Congress mulls a $700 billion proposal to bail out the banking system. That compares with 58 percent odds on Sept. 23.

`Grave Threats'

Bush said in an address to the nation that without the rescue the U.S. will suffer ``a long and painful'' recession. Treasury Secretary Henry Paulson said the financial system is ``frozen to a large extent.'' Fed Chairman Ben S. Bernanke said the U.S. faces ``grave threats'' to market stability.

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, slipped to 76.477 from 76.788 yesterday. It touched 75.890 on Sept. 22, the lowest since Aug. 13.

``The U.S. is the epicenter of the financial crisis,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, in a Bloomberg television interview. ``The right medium-term trade is to be selling the dollar.''

The collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. has caused a seizure in lending between banks. The three-month London interbank offered rate, or Libor, the rate at which banks charge each other for loans in dollars, rose to 3.48 percent yesterday, the highest in eight months, according to the British Bankers' Association.

U.S. Home Sales

Sales of new houses in the U.S. fell to an annual rate of 510,000 last month, from 515,000 in July, according to the median forecast of economists surveyed by Bloomberg News. Sales declined to a 503,000 pace in June, the lowest since 1991. The Commerce Department report is due at 10 a.m. in Washington.

The dollar dropped versus 13 of the 16 most-active currencies today. It has fallen 6 percent against the euro since touching a one-year high of $1.3882 on Sept. 11. The dollar reached $1.6038 on July 15, the weakest level since the European currency made its debut in 1999.

The British pound climbed against 13 of the 16 most-traded currencies after Sentance said policy makers should guard against ``allowing the economic slowdown to develop into a deflationary spiral which would not be consistent with our mandate to meet the 2 percent inflation target.''

Risk Reduction

The yen may rise as slowing export growth added to evidence of a global economic slump, prompting investors to reduce purchases of higher-yielding assets financed in Japan, so-called carry trades. In such transactions, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits. The benchmark interest rate is 0.5 percent in Japan, compared with 13.75 percent in Brazil and 5.25 percent in South Korea.

Bank of Japan board member Tadao Noda said today that global growth will slow, threatening the bank's expectation that Japan's economy will recover after shrinking in the second quarter. Economic and Fiscal Policy Minister Kaoru Yosano said a drop in Japan's exports was triggered directly and indirectly by the U.S. subprime crisis.

``Investors may become risk-averse,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe General SA, France's largest bank by market value. ``The yen may be bought.''

Technical Chart

Japan's exports grew 0.3 percent in August from a year earlier after rising 8 percent the previous month, the Finance Ministry said today in Tokyo.

The yen climbed 0.7 percent to 10.95941 versus the Korean won, and advanced 0.4 percent to 56.8295 against Brazil's real.

Technical charts used to predict price movements signal the euro may rise to $1.4900 in the next few days provided the currency stays above its moving average for the past five days, according to Masashi Hashimoto, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

Resistance at $1.4900 is near the upper Bollinger band on the euro's daily chart. Bollinger bands are two standard deviations above and below the average price of a currency or security over the past 20 days. Resistance is a level where sell orders may be clustered.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net