U.S. Dollar Weakens on Concern Lehman to File for Bankruptcy

By Ron Harui and Candice Zachariahs

Sept. 15 (Bloomberg) -- The U.S. dollar fell against the euro on concern Lehman Brothers Holdings Inc. may file for bankruptcy after potential buyers abandoned talks and the government said it won't step in with funds.

The greenback dropped to its lowest in almost two months against the yen after Barclays Plc and Bank of America Corp. pulled out of discussions with the U.S. securities firm, spurring investors to reduce holdings of higher-yielding assets financed in Japan. U.S. stock futures and Asian shares slumped, while Treasuries rallied, as the prospect of liquidation at Lehman prompted investors to shun riskier assets.

``It will really be a battle between U.S. dollar weakness and carry-trade unwind, and add to that very thin liquidity with Tokyo and Hong Kong out'' because of public holidays, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. ``The U.S. dollar is likely to continue to weaken.''

The dollar fell to $1.4481, the lowest since Sept. 4, before trading at $1.4448 per euro at 12:32 p.m. in Tokyo, from $1.4224 in New York late last week. It touched $1.3882 on Sept. 11, the strongest since Sept. 18, 2007. It may weaken to $1.45 per euro over the next couple of days, Trinh said.

The U.S. currency dropped 2.1 percent to 105.64 yen. It earlier reached 105.27 yen, the lowest since July 17. The currency is headed for the biggest one-day decline since Aug. 16. 2007, when a global stocks rout prompted investors to reduce so- called carry trades.

Rate Cut Speculation

The greenback weakened as stock-index futures tumbled on concern a potential Lehman bankruptcy will add to banks' $514 billion of subprime-related losses. The Standard & Poor's 500 Index futures expiring in December snapped three days of gains, sliding 3.7 percent. The MSCI Asia-Pacific Index of regional shares excluding Japan declined 1.1 percent and two-year Treasuries gained the most since January.

Markets in China, Hong Kong, Japan and South Korea are all shut for holidays today.

The dollar also declined on rising speculation the Federal Reserve will cut interest rates when policy makers meet tomorrow. Futures on the Chicago Board of Trade showed late last week a 12 percent chance that the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point compared with 10 percent odds on Sept. 11.

``It's highly likely that the Fed will have to cut interest rates again,'' said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, where he is responsible for A$17 billion ($14 billion) in assets. ``In general, that's quite negative for the U.S. dollar.''

Risk Aversion

The dollar had gained about 11 percent through to the end of last week since touching an all-time low of $1.6038 per euro on July 15.

The yen advanced against all of the 16 most-active currencies as investors reduced so-called carry trades, in which funds are borrowed in a country with low interest rates and used to buy assets where returns are higher, earning the spread between the two. The risk is that currency market moves erase those profits.

``We have been very bearish dollar-yen and we're projecting dollar-yen to 100 by year-end because of these risk aversion reasons,'' said Boris Schlossberg, director of currency research in New York at online currency trader GFT Forex, in a Bloomberg News interview.

Benchmark interest rates are 0.5 percent in Japan and 2 percent in the U.S., compared with 7 percent in Australia and 7.5 percent in New Zealand, making them favorite targets for the carry trade.

Carry Trades

The Australian and New Zealand dollars approached two-year lows against the yen. Barclays, which had emerged as a leading candidate to acquire Lehman, pulled out of negotiations first, contending it couldn't obtain guarantees from the government or other Wall Street firms to protect against potential losses on Lehman's assets. Bank of America withdrew about three hours later, according to a person with knowledge of the talks.

Australia's dollar fell 2.2 percent to 86.90 yen from 88.88 yen late in New York on Sept. 12, when it reached 84.09 yen, the lowest since June 2006. New Zealand's dollar declined 2.1 percent to 70.63 yen. It touched 68.57 yen on Sept. 12, the weakest since May 2006.

Implied volatility on one-month U.S. dollar options against the yen climbed to 13.50 percent from 12.67 percent late in New York on Sept. 12. Higher volatility may discourage carry trades as it indicates a larger risk of exchange-rate fluctuations.

Futures traders reversed their bets that the yen will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 14,821 on Sept. 9, compared with net shorts of 5,020 a week earlier.

To contact the reporter on this story: Ron Harui in Tokyo at rharui@bloomberg.net; Candice Zachariahs in Sydney at Czachariahs2@bloomberg.net