Dollar Heads for Biggest Weekly Gain on Currency Funding Demand

By Ye Xie and Daniel Kruger

Oct. 3 (Bloomberg) -- The dollar rose against the euro, heading for its biggest weekly gain ever, on a surge in demand for U.S. currency funding amid a global credit crunch.

The greenback was poised for a third weekly drop versus the yen after the government's payroll report showed the U.S. lost the most jobs in five years in September. The U.S. House of Representatives prepared to vote on a revised $700 billion financial bailout after rejecting a plan Sept. 29.

``Very strong demand for dollars is still evident,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. Traders waited until after the payroll data to buy dollars against the euro because they wanted to ``clear the event risk.''

The dollar increased 0.6 percent to $1.3732 per euro at 10:14 a.m. in New York, from $1.3819 yesterday. It touched $1.3703, the strongest level since September 2007. It has increased 6 percent this week, the most since the 15-nation currency made its debut in 1999. The dollar traded at 105.49 yen, compared with 105.33, and was headed for a 0.5 percent weekly decline. The euro decreased 0.5 percent to 144.90 yen, from 145.55.


The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars increased to 4.33 percent, the most since January, the British Bankers' Association said. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

U.S. payrolls shrank by 159,000 last month, following a revised decline of 73,000 in August, the Labor Department said today in Washington. The median forecast of 76 economists surveyed by Bloomberg News was for a reduction of 105,000. The jobless rate stayed at 6.1 percent.

Jobless Rolls

The number of people staying on jobless rolls rose to 3.591 million, the highest since September 2003, in the week ended Sept. 20, the Labor Department reported yesterday.

``The U.S. economy is nowhere near recovery,'' said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 50.2, higher than forecast, from 50.6 in August, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between growth and contraction.

The euro was headed for a record weekly drop against the dollar after European Central Bank President Jean-Claude Trichet said yesterday policy makers discussed cutting the main refinancing rate. European economies face ``increasing downside risks,'' he said at a press conference following the decision to keep borrowing costs at a seven-year high of 4.25 percent.

Euribor Futures

The implied yield on the Euribor futures contract expiring in March fell to 4.10 percent, from 4.77 percent a month ago. The Euribor contract has averaged 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show.

Investors should sell the euro at 145 yen with a target of 135 yen after the ECB signaled it may lower borrowing costs for the first time in five years, according to Morgan Stanley.

``Growth prospects in the euro zone are dimming quickly and may force the ECB's easing hand sooner rather than later,'' New York-based strategists Sophia Drossos and Yilin Nie wrote in a research note yesterday.

Five European banks including Dexia SA, the world's biggest lender to local governments, and Fortis, Belgium's largest financial-services firm, accepted government-backed bailouts this week.

Fed Rate Outlook

Traders raised bets that the Federal Reserve will reduce the target lending rate by as much as three-quarters of a percentage point this month. Futures on the Chicago Board of Trade showed a 92 percent chance that the central bank will cut its 2 percent benchmark by a half-percentage point at its Oct. 29 meeting, with the balance of bets on a reduction of 0.75 percentage point. Futures showed no chance of lower borrowing costs a month ago.

The U.S. House will vote on the latest version of the financial bailout at about 12:30 p.m. in Washington. The Senate voted 74-25 on Oct. 1 in favor of legislation that links the rescue to an increase in bank-deposit insurance limits and tax breaks after the House rejected an earlier version of the bill.

Wells Fargo & Co., the biggest U.S. bank on the West Coast, agreed to buy all of Wachovia Corp. for about $15.1 billion in stock, trumping Citigroup Inc.'s offer four days ago for part of the embattled North Carolina lender.

The U.S. currency surged 12 percent versus the euro last quarter, its biggest gain since the European currency started trading, as the credit crisis that began in the U.S. with rising delinquency rates for subprime mortgages spread to continental Europe and the U.K.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net