Dollar Falls Before Home Sales, Traders Raise Fed Rate Cut Odds

By Ron Harui and Stanley White

Sept. 25 (Bloomberg) -- The dollar ended two days of gains against the euro before a U.S. government report that economists estimate will show new home sales dropped and as traders raised bets for a Federal Reserve cut in interest rates next month.

The dollar declined versus the British pound and Swiss franc as President George W. Bush said the U.S. is in the ``midst of a serious financial crisis'' and ``our entire economy is in danger.'' Futures show 80 percent odds the Fed will lower borrowing costs in October compared with 58 percent on Sept. 23 as Congress delays a $700 billion bailout proposal.

``Sentiment is against the dollar and I don't expect a recovery before the end of this year,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``The deteriorating U.S. economy is a risk to the dollar.''

The dollar fell to $1.4714 per euro as of 11:05 a.m. in Tokyo from $1.4621 late in New York yesterday. It declined to 105.91 yen from 106.11. The euro was at 155.88 yen from 155.15.

The U.S. currency dropped to $1.8558 against the pound from $1.8465, slipped to 1.0836 versus the franc from 1.0916 and bought C$1.0358 from C$1.0386 to the Canadian dollar. South Korea's won fell to a four-year low.

`A Step Backward'

The greenback also weakened as Treasury Secretary Henry Paulson said the financial system was ``frozen to a large extent'' and Fed Chairman Ben S. Bernanke said the U.S. is facing ``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 76.584 from 76.788 yesterday. It touched 75.890 on Sept. 22, the lowest since Aug. 13.

``There has clearly been a little bit of a step backward in recent days with a lot of pushback from Congress with regards to this plan,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, in a Bloomberg television interview. ``At the end of the day, the U.S. is the epicenter of the financial crisis. The right medium-term trade is to be selling the dollar.''

Global money market rates have surged amid the reluctance of banks to lend as credit-market losses and writedowns surpassed $500 billion. The collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. only served to freeze up credit.

Money Markets

The dollar dropped versus 14 of the 16 most-active currencies today. It has fallen 5.5 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.

Without the bailout, ``credit will be restricted further for homeownership, for small business, for individual consumers and so on, but that is not just an inconvenience,'' Bernanke said. ``What that is going to do is affect spending and economic activity and it will cause the economy as a whole to decline and be much weaker than it otherwise would be.''

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, the highest in eight months, according to the British Bankers' Association.

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.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net