Dollar, Yen Fall as Stocks Rise, Bank Borrowing Costs Decline

By Ye Xie and Lukanyo Mnyanda

Nov. 4 (Bloomberg) -- The dollar and the yen fell against the euro as gains in global stocks and declines in money-market interest rates reduced demand for haven currencies.

The greenback also dropped against the New Zealand and Australian dollars as the cost of borrowing dollars for one month in London slid to the lowest level in almost four years. Brazil's real and South Africa's rand advanced as thawing credit markets encouraged demand for emerging-market assets.

``It's a broad setback for the dollar,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. ``We do see some signs of tension subsiding a bit. This correction phase could last weeks.''

The dollar fell 1.3 percent to $1.2813 per euro at 8:59 a.m. in New York, from $1.2643 yesterday. It reached $1.2527, the strongest level since Oct. 28. The euro climbed 1.5 percent to 127.24 yen from 125.33. The yen fell 0.2 percent to 99.29 per dollar from 99.12.

The London interbank offered rate, or Libor, that banks charge each other for one-month loans in dollars slid for a 17th day as central-bank cash injections and interest-rate cuts worldwide showed signs of reviving lending. The rate dropped 0.18 percentage point to 2.18 percent, the lowest level since November 2004, according to the British Bankers' Association.

The MSCI World Index of stocks for 23 developed countries added 1.2 percent, its sixth consecutive gain, the biggest run of advances since July. Standard & Poor's 500 Index futures expiring in December added 2.1 percent.

Aussie Gains

Australia's dollar rose 2.2 percent to 69.28 U.S. cents and the New Zealand currency increased 2.4 percent to 60.57 U.S. cents on speculation revived bank lending will boost demand for the country's assets. The Aussie fell earlier as much as 2.4 percent to 66.03 U.S. cents after the Reserve Bank lowered the cash rate by 0.75 percentage point from 6 percent.

The pound dropped 1 percent to 80.69 pence per euro as a report showed Britain's construction industry contracted in October at the fastest pace in more than a decade. The Bank of England will cut the main interest rate by a half-percentage point to 4 percent on Nov. 6, according to the median forecast of 60 economists surveyed by Bloomberg News.

In a sign of renewed demand for assets in developing nations, the rand rose 1.9 percent to 9.8508 per dollar, while the real gained 1.7 percent to 2.1426 versus the dollar.

The yen fell 2.8 percent to 68.90 against the Australian dollar and 3.3 percent to 60.53 versus New Zealand's currency on speculation stock gains will encourage carry trades in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.3 percent compares with 5.25 percent in Australia and 6.5 percent in New Zealand.

ECB Rate

The European Central Bank will cut its main refinancing rate by a half-percentage point to 3.25 percent on Nov. 6, according to the median forecast of 54 economists surveyed by Bloomberg News.

The economy of the countries that use the currency probably entered a recession this year and will stagnate in 2009, the European Commission said yesterday. European manufacturing contracted at a record pace in October.

``The trend is for the euro to weaken,'' said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan's second-largest publicly traded lender. ``Recession has reared its head in Europe, and that's fairly negative for sentiment.''

The Federal Reserve reduced its target rate for overnight bank loans by a half-percentage point to 1 percent on Oct. 29. Futures on the Chicago Board of Trade show a 55 percent chance it will cut the rate to 0.5 percent next month.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net