Dollar Heads for Weekly Loss Against Euro on Recession Concerns

By Ron Harui
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Oct. 17 (Bloomberg) -- The dollar headed for its first weekly decline against the euro this month, before U.S. reports that will probably show a deepening housing slowdown eroded consumer confidence.

The U.S. currency also dropped on prospects the credit crisis will hurt growth in the world's largest economy, prompting traders to add to bets on a Federal Reserve interest-rate cut. The yen was poised for a weekly loss versus the dollar and the euro as Asian stocks rose, restoring investors' confidence to sell the currency.

``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 traded at $1.3467 per euro at 12:36 p.m. in Tokyo from $1.3456 late in New York yesterday and was 0.4 percent lower from $1.3408 on Oct. 10. It traded at 101.58 yen from 101.57 yen yesterday and from 100.67 a week ago, set for its first five-day since Sept. 12.

The U.S. currency was little changed at 1.1375 versus the Swiss franc from 1.1379 yesterday and from 1.1390 a week ago. It also traded at $1.7336 against the British pound from $1.7304 yesterday and from $1.7043 last week.


The yen traded at 136.80 per euro from 136.73 yesterday and from 134.96 on Oct. 10, and was poised for its first weekly loss in four weeks. It declined to 70.41 versus Australia's dollar from 67.72 late in Asia yesterday and dropped to 62.63 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 cut are 54 percent.

Losses in the dollar may be limited 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 strongest 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 2.2 percent and the MSCI Asia-Pacific Index of regional shares rose 1.2 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 20.47 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 risk is that currency market moves erase those profits.

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