Dollar Trades at One-Year Low Versus Euro on Economy Before Fed

By Anchalee Worrachate and Ron Harui

Sept. 23 (Bloomberg) -- The dollar traded within a cent of a one-year low against the euro on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets.

The U.S. currency also weakened versus the pound and South Korean won as economists forecast the Federal Reserve will signal today it intends to keep holding down borrowing costs. New Zealand’s dollar was the biggest gainer versus the greenback among major currencies as the nation’s economy unexpectedly grew for the first time in six quarters.

“The dollar is likely to remain weak in the near term,” said Lee Hardman, a currency strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “What’s driving the dollar lower is the exceptionally loose liquidity conditions, and this encourages its use as a funding currency.”

The dollar traded at $1.4778 per euro at 7:09 a.m. in New York, from $1.4790 yesterday, after earlier declining to $1.4842, the weakest level since Sept. 22, 2008. The U.S. currency rose 0.3 percent to 91.37 yen, from 91.10. The yen weakened 0.2 percent to 135.01 per euro, from 134.76.

The pound advanced 0.5 percent to $1.6434 and 0.6 percent to 89.91 pence per euro as minutes of the Bank of England’s meeting showed Governor Mervyn King agreed this month to follow through with policy makers’ August decision for 175 billion pounds ($286 billion) of asset purchases, suspending his drive to buy more.

Switching Sides

King and David Miles switched sides and joined a unanimous vote for no change in the plan, arguing that a higher amount would be justified yet consensus was desirable for now. All nine members of the Monetary Policy Committee also opted to keep the main rate at 0.5 percent, minutes of the Sept. 10 decision released by the central bank today in London showed.

“It’s obviously a positive result for sterling,” said Geoffrey Yu, a currency strategist at UBS AG in London. “King has backed down a bit now, and they have a better outlook for the economy, which is better for the pound. It raises a question over whether they will still extend the asset purchase program.”

New Zealand’s dollar, known as the kiwi, appreciated as high as 73.12 U.S. cents, the strongest since August 2008, before trading up 1 percent at 72.48 cents. Statistics New Zealand said gross domestic product grew 0.1 percent in the three months to June 30, following a 0.8 percent drop in the first quarter. A Bloomberg News survey of economists forecast a 0.2 percent contraction.

‘Leading the Charge’

“The market was looking for direction, and the kiwis gave it,” said Tony Bieber, a foreign-exchange trader at Suncorp- Metway Ltd. in Brisbane. “The kiwis are leading the charge against the U.S. dollar.”

Traders are betting the Reserve Bank of New Zealand will raise its 2.5 percent benchmark interest rate by 1.53 percentage points over the next 12 months, compared with a prediction for 1.36 percentage points yesterday, according to a Credit Suisse Group AG index based on overnight swaps.

The Federal Open Market Committee will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflected Fed orders to banks to raise more capital and toughen lending standards, analysts said.

All 93 economists surveyed by Bloomberg said the Fed will keep its target lending rate at zero to 0.25 percent at its two- day meeting ending today. Chairman Ben S. Bernanke and his colleagues may discuss how to wind down purchases of mortgage- backed securities, analysts said.

‘Risks’ With Fed

“You’ve obviously got some risks with the Fed, but unless they come out and surprise with being hawkish, which I don’t think they will, it’s another reason dollar bears will feel comfortable with their position,” said Phil Burke, chief foreign-exchange dealer at JPMorgan Chase Bank in Sydney.

Futures contracts on the Chicago Board of Trade show a 41 percent chance the Fed will keep rates unchanged through March, up from a 27 percent chance a month ago.

The Dollar Index, which the ICE uses to track the dollar against the currencies of six major U.S. trading partners, dropped to as low as 75.892, the weakest level since Sept. 22, 2008, before being little changed at 76.177.

The yen gained for a second day against the dollar on speculation world leaders attending a Group of 20 meeting this week will signal currencies other than the dollar need to strengthen to help rebalance global economic growth.

‘Sustained Growth’

Policy makers need to promote a “sustained growth track and facilitate global adjustment, as well as structural reform, which will need to be undertaken in both deficit and surplus countries,” Dimitri Soudas, a spokesman for Canadian Prime Minister Stephen Harper, told reporters Sept. 21 in Ottawa. The G-20 meeting starts tomorrow in Pittsburgh.

“The dollar remains under selling pressure as the G-20 summit moves toward reforming the international monetary system,” Philip Wee, a senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note sent to clients today.

Asian currencies gained, paced by the won and the Philippine peso, as signs the global recovery is gaining traction spurred investors to buy more emerging-market assets. The won rose 0.8 percent to 1,194.45 per dollar.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net