Dollar Falls Versus Euro as Traders Raise Bets on Fed Rate Cut

By Ye Xie and Bo Nielsen

Sept. 25 (Bloomberg) -- The dollar fell against the euro for the first time in three days after traders increased bets the Federal Reserve will cut borrowing costs next month as credit market losses threatened to slow economic growth further.

The greenback weakened versus the Brazilian real and the South African rand as orders for U.S. durable goods fell in August more than twice as much as forecast. The pound rose against the dollar as policy maker Andrew Sentance said the Bank of England must temper its response to the credit crisis and stick to its inflation focus.

``The right medium-term trade is selling the dollar,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, in an interview on Bloomberg Television. ``It looks like the U.S. economy is slowing again more than any other part of the world. When you add together all the fiscal contingent liability risk the U.S. government is taking on to backstop the financial system, you really have to question the long-term prospects for the dollar.''

The dollar fell 0.5 percent to $1.4698 per euro at 10:14 a.m. in New York, from $1.4621 yesterday. The U.S. currency advanced 0.2 percent to 106.27 yen, from 106.11. The euro increased 0.7 percent to 156.23 yen, from 155.15.

Futures contracts on the Chicago Board of Trade showed a 98 percent chance that the Fed will cut the 2 percent target rate for overnight lending between banks on Oct. 29. That compares with 80 percent odds yesterday.

Congress moved closer to an agreement on a $700 billion plan to rid banks of distressed mortgage securities as President George W. Bush urged swift action to help avert ``a long and painful'' recession.

Bernanke on `Threats'

Fed Chairman Ben S. Bernanke told lawmakers yesterday the U.S. faces ``grave threats'' to market stability, signaling risks to U.S. growth are greater than policy makers saw them just last week. The financial system is ``frozen to a large extent,'' Treasury Secretary Henry Paulson said.

``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 at Bank of New York Mellon Corp. in London. The bailout package ``may restore confidence in a lot of things, but it won't restore confidence in the dollar.''

The euro may advance as high as $1.53 as the market refocuses on economic fundamentals once the bailout package is in place, said Tom Fitzpatrick, London-based global head of currency strategy at Citigroup Global Markets Inc., in a note sent to Bloomberg yesterday.

Higher Libor

The collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. have led to a seizure in lending between banks. The three-month London interbank offered rate, or Libor, for dollars rose to 3.77 percent today, the highest level relative to the Fed's target rate on record.

``The credit channel is blocked up,'' said Stephen Malyon, co-head of currency strategy in Toronto at Scotia Capital Inc., a unit of Canada's third-largest bank by assets. ``Odds favor the next move by the Fed will be a cut. It surely will hurt the dollar.''

Sterling climbed 0.5 percent to $1.8558 after Sentance said policy makers should guard against ``allowing the economic slowdown to develop into a deflationary spiral.'' The median forecast of 46 economists surveyed by Bloomberg News is for the Bank of England to hold its target rate at 5 percent on Oct. 9.

Taiwan's dollar lost 0.2 percent to 32.008 per U.S. dollar after the central bank unexpectedly reduced interest rates for the first time since 2003, saying the deepening global financial crisis has heightened the risk of an economic slump. Governor Perng Fai-nan and colleagues cut the discount rate on 10-day loans to banks by 12.5 basis points to 3.5 percent. Only two of 13 economists surveyed by Bloomberg News expected the decision.

Dollar's Decline

The dollar 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.

Orders for U.S. durable goods, items meant to last several years, dropped 4.5 percent in August after a revised 0.8 percent gain in the prior month, the Commerce Department reported today. The median forecast of 74 economists surveyed by Bloomberg News was for a 1.9 percent decrease.

``Restrictive credit conditions are preventing previous rate cuts from stimulating the economy,'' said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. ``At the same time, economies in Europe and Japan are not getting better. The euro-dollar in the $1.45-$1.50 range is consistent with economic fundamentals and rate expectations.''

The dollar dropped 1.8 percent to 1.8262 reais and 0.8 percent to 8.1048 rand.

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