Dollar Falls to Eight-Week Low on Outlook for Fed Rate Cut

By Jamie McGee and Kim-Mai Cutler

Dec. 15 (Bloomberg) -- The dollar weakened to $1.36 per euro for the first time in eight weeks on speculation the Federal Reserve will cut borrowing costs to near zero.

The greenback approached a 13-year low against the Japanese currency as a Fed report showed New York state manufacturing contracted in December at the fastest pace on record. The pound weakened to a record 90 pence per euro after an industry report showed house prices in the U.K. extended declines in December.

“We will stay in a low-interest-rate environment for some time,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York. “That will take away interest-rate play, and the dollar will suffer.”

The dollar declined 1.7 percent to $1.3602 per euro at 9:58 a.m. in New York, from $1.3369 on Dec. 12, after touching $1.3607, the weakest level since Oct. 15. The dollar slid 0.8 percent to 90.44 yen from 91.21, after reaching 88.53 yen on Dec. 12, the weakest level since August 1995. The euro rose 1 percent to 123.05 yen from 121.83.

The pound slid 0.6 percent to 88.98 pence after Rightmove Plc, operator of a residential-property Web site, said the average house price in the U.K. advertised by sellers fell 2.3 percent in December. Sterling touched 90.21 pence, the weakest level since the 15-nation euro’s debut in 1999. Sterling gained 0.8 percent to $1.5069.

The cost of borrowing in dollars over three months, or the London interbank offered rate, fell for a fifth day in a sign that short-term funding pressures and dollar demand may be easing. The rate for three-month loans decreased to 1.87 percent, according to British Bankers’ Association data.

Confidence Is ‘Back’

“More and more confidence is seeping back,” said Martin McMahon, a Zurich-based foreign-exchange strategist at Credit Suisse Group AG. “This is more from policy measures and the frequency of them, rather than the economic data. Dollar strength had been a defensive play, and now that’s unwinding a bit.”

The dollar gained 8.2 percent against the euro this year as almost $990 billion of credit-market losses sparked a seizure in money markets, encouraging investors to buy the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.

Futures on the Chicago Board of Trade showed a 70 percent chance the Fed will trim its 1 percent target rate for overnight lending between banks to 0.25 percent at its meeting tomorrow, compared with zero odds a month ago.

‘Under Pressure’

“The dollar is going to remain under pressure until we get the outcome of the Fed meeting,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “It’s no longer the safe haven that it was previously. The Japanese yen and now the euro are beneficiaries of that.”

International demand for long-term U.S. financial assets weakened in October as foreign investors sold American stocks, corporate bonds and agency debt.

Total net purchases of long-term equities, notes and bonds fell to a net $1.5 billion in October from $65.4 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $286.3 billion, compared with net buying of $142.6 billion the previous month.

The New York Fed’s general economic index fell to minus 25.8 this month, the lowest level since records began in 2001, from minus 25.4 percent in November, the bank said. Readings below zero for the Empire State index signal that manufacturing is shrinking.

Bush on Automakers

President George W. Bush, traveling on Air Force One from Iraq to Afghanistan yesterday, said he “signaled” his administration is considering using money from the $700 billion Troubled Asset Relief Program to help General Motors Corp. and Chrysler LLC stay out of bankruptcy. Bush said he’s “not quite ready” to announce any rescue plan.

Citigroup Inc., Goldman Sachs Group Inc., BNP Paribas SA and Bank of America Corp. predict further weakness in the dollar after a four-month, 24 percent rally. Last week was the first time in almost a month that consensus estimates for the dollar against the euro through 2009 fell, according to a Bloomberg News survey.

The U.S. currency slid 5.9 percent measured by the trade- weighted Dollar Index from a two-year high on Nov. 21 after strengthening from July to November. Since peaking three weeks ago, the dollar fell against all 16 of the most widely traded currencies tracked by Bloomberg.

The yen advanced 62 percent against the Australian dollar and 83 percent versus the South African rand in 2008 on speculation the global recession will prompt investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy higher-yielding assets. Japan’s 0.3 percent target lending rate is the lowest among major economies.

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net