Dollar Falls to Three-Week Low Versus Euro on Deficit Concern

By Ye Xie and Bo Nielsen

Sept. 22 (Bloomberg) -- The dollar dropped to a three-week low against the euro and fell versus the yen on concern a U.S. proposal to buy $700 billion of troubled assets from financial institutions will widen the country's budget deficit.

The U.S. currency weakened for a fourth day against the euro in its longest stretch of decline since June before reports this week that may show tighter lending rules contributed to a decrease in home sales and durable goods orders, bolstering the case for interest-rate cuts by the Federal Reserve. South Africa's rand depreciated the most against the dollar among the major currencies after President Thabo Mbeki resigned.

``The massive increase in the deficit is starting to make people rethink the shape of all sorts of things, including the dollar,'' said Alan Ruskin, head of international currency strategy for North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``We have shifted from the mode of buying dollars on dips to selling the dollar on upticks.''

The dollar fell 0.7 percent to $1.4563 per euro at 8:36 a.m. in New York, from $1.4466 on Sept. 19. It touched $1.4625, the weakest level since Sept. 1. The dollar may slide to $1.50 in the next several weeks, according to Ruskin. The dollar dropped 0.7 percent to 106.70 yen, from 107.45. The euro traded at 155.41 yen, compared with 155.46.

Treasury Secretary Henry Paulson's plan, sent to Congress Sept. 20, would mark unprecedented government participation in markets and increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. Officials may also provide $400 billion of guarantees for money-market funds.

Increase in Borrowing

The rescue plan will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. The Congressional Budget Office projects the budget deficit will increase to $438 billion next year from $407 billion.

The dollar will get ``crushed,'' as the extra spending reduces the allure of U.S. assets to foreign investors, said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.

Paulson and Fed Chairman Ben S. Bernanke began plotting the rescue last week after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy, the government seized control of American International Group Inc. and Merrill Lynch & Co. was forced into the arms of Bank of America Corp. Paulson and Bernanke are due to testify before the Senate tomorrow about the banking crisis.

Fed Rate Outlook

The chance of the Fed cutting its benchmark 2 percent rate by a quarter-percentage point at an Oct. 29 policy meeting was 38 percent, compared with zero a month ago, futures contracts on the Chicago Board of Trade showed.

Existing home resales declined to 4.94 million from 5 million in July, according to a Bloomberg News survey. The National Association of Realtors' report is scheduled for release on Sept. 24. The Commerce Department may report the next day that sales of new houses dropped to 510,000 from 515,000 in July, according to a separate survey. Orders for durable goods fell 1.8 percent in August after a 1.3 percent increase in the prior month, another survey showed. The report is due Sept. 25.

The rand fell as South African President Mbeki's resignation increased concern foreign investors may sell the country's assets during global financial turmoil. The rand weakened 1.3 percent to 8.0233 per dollar.

The yen rose 0.6 percent to 89.04 against the Australian dollar and 1.4 percent versus the New Zealand dollar to 72.99.

Carry Trades

The yen typically rises when demand for higher-yielding currencies declines, as investors reduce so-called carry trades. In such transactions, traders get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits.

The Bank of Japan's benchmark rate of 0.5 percent compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand.

``Even with a plan, the likelihood there will be a very severe slowdown in the U.S. and elsewhere has increased,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``I don't think people will return to the same old risk-taking world.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net