Dollar Falls, Heads for Weekly Loss, on U.S. Recession Concerns

By Ron Harui
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Oct. 17 (Bloomberg) -- The dollar fell, heading for its first weekly decline against the euro this month, before U.S. consumer and housing reports that may add to evidence the global credit squeeze is pushing the economy toward a recession.

The U.S. currency also dropped against the British pound and the Swiss franc as traders added to bets on a Federal Reserve interest-rate cut. The yen was poised for a weekly loss versus the euro as Asian stocks rose, restoring investors' confidence to buy higher-yielding assets

``The reports may reinforce worries that the U.S. is in a recession and concerns linger over its financial markets,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``The dollar is still a sell.''

The dollar dropped to $1.3490 per euro at 7:30 a.m. in London from $1.3456 late in New York yesterday and was 0.6 percent lower for the week. It traded at 101.45 yen from 101.57 yen yesterday and 100.67 on Oct. 10, set for its first five-day gain since Sept. 12.

The U.S. currency declined to 1.1363 versus the Swiss franc from 1.1379 yesterday and from 1.1390 a week ago. It weakened to $1.7346 against the British pound from $1.7304 yesterday and from $1.7043 last week. The greenback slipped to 1,334.50 against South Korea's won from 1,373.45.

The yen fell to 136.83 per euro from 136.73 yesterday and 134.96 on Oct. 10, and was poised for its first weekly loss in four weeks. It dropped to 70.01 versus Australia's dollar from 67.72 late in Asia yesterday and fell to 62.45 against New Zealand's dollar from 61.28.

Economic Reports

The dollar headed for weekly losses against nine of the 16 most-active currencies as U.S. housing starts declined to an annual rate of 870,000 in September, the fewest since January 1991, according to a Bloomberg News survey of economists. The Commerce Department will issue the report at 8:30 a.m. in Washington.

The Reuters/University of Michigan preliminary index of consumer sentiment, due at 10 a.m., likely decreased to 65.0 in October from 70.3 in September, a separate survey showed.

Futures traded on the Chicago Board of Trade show a 46 percent chance the Fed will lower its 1.5 percent target rate for overnight bank loans by a half-percentage point to 1 percent at its Oct. 29 meeting. Traders saw no chance of a cut of that magnitude a week ago. The odds of a quarter-point reduction are 54 percent.


Losses in the dollar may be curbed on speculation financial institutions will seek more dollars in the foreign-exchange market amid the credit crisis, according to BNP Paribas SA.

`Requirement for Dollars'

``The U.S. dollar's strength against most Asian currencies has to be put into context that this recent credit crunch in the U.S. economy has led to a lot of requirement for dollars from banks as well as companies,'' said Thio Chin Loo, a senior currency strategist at BNP Paribas in Singapore, in an Bloomberg Television interview. ``It's really the flow of funds that's driving the U.S. dollar stronger.''

The dollar rose to the highest versus the euro since March 2007 on Oct. 10, partly as banks' reluctance to lend to each other prompted a surge in demand for U.S. currency funding in global money markets.

The London interbank offered rate, or Libor, that banks charge each other for one-month dollar loans, fell yesterday to 4.278 percent from 4.588 percent a week ago, the highest level this year, according to the British Bankers' Association.

The yen declined as the Nikkei 225 Stock Average climbed 2.8 percent and the MSCI Asia-Pacific Index of regional shares rose 1.4 percent. The Standard & Poor's 500 Index advanced 4.3 percent yesterday.

`Less Risk Averse'

Volatility implied by one-month dollar-yen options fell to 20.35 percent from 23.22 percent yesterday and from 29.64 percent on Oct. 10, indicating a smaller risk of exchange-rate fluctuations that may erode profits on so-called carry trades.

``Shares are higher and investors appear to be less risk averse,'' said Yuji Saito, head of the foreign-exchange group at Societe Generale SA in Tokyo. ``There's a bit of yen selling.''

The benchmark interest rate is 0.5 percent in Japan, compared with 6 percent in Australia and 7.5 percent in New Zealand.

In a carry trade, 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 euro may extend losses to its lowest level against the yen in 4 1/2 years after the currency completed a so-called ``double-top'' formation on the weekly chart, according to a report from Citigroup Global Markets Inc.

``The formation in euro-yen remains intact and continues to suggest a move to at least 130,'' wrote New-York based strategist Tom Fitzpatrick and London-based Shyam Devani in a research note yesterday. That level was last seen in April 2004.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net