Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation

Dollar Falls to Record Against Euro on Fed Rate-Cut Speculation

Feb. 27 (Bloomberg) -- The dollar weakened below $1.50 per euro for the first time on speculation Federal Reserve Chairman Ben S. Bernanke will indicate the U.S. central bank is ready to cut interest rates from a three-year low.

The dollar weakened against 15 of the 16 most-active currencies before Bernanke's testimony to Congress today. It reached a 23-year low versus the New Zealand dollar and fell the most against South Africa's rand as investors bought higher- yielding currencies.

``We're in a new regime for the dollar,'' said Bilal Hafeez, London-based global head of currency strategy at Deutsche Bank AG, the world's biggest foreign-exchange trader. ``The proximate cause has been European data, which has indicated that Europe hasn't suffered on the growth side as the U.S. has.''

The dollar fell to $1.5088 per euro, the lowest since the European single currency's debut in 1999, before trading at $1.5053 as of 9:33 a.m. in London, from $1.4974 yesterday in New York. It also declined to 106.42 yen from 107.28 yen. The euro was at 160.26 yen from 160.67, after reaching 161.39. The dollar may fall to $1.55 per euro by the end of the first quarter, Hafeez predicted.

Bernanke delivers his semi-annual testimony to the House Financial Services Committee at 10 a.m. in Washington.

The currency fell to a three-week low against the rand, dropping 0.5 percent to 7.5139 after gold rose to a record. It slid 0.9 percent to NT$30.913 versus Taiwan's currency, breaching NT$31.0 for the first time in almost three years, as Asian stocks gained for a third day.

Yield Advantage

The dollar fell to a 23-year low of 82.08 U.S. cents against the New Zealand dollar on speculation the interest-rate differential will widen in favor of assets outside of the U.S. It was at 93.92 cents per Australian dollar from 93.38. Benchmark rates are 8.25 percent in New Zealand and 7 percent in Australia.

The slump in the dollar pushed oil prices to a record above $102 today and increased the cost of buying wheat, sugar, copper, cotton, cocoa and precious metals. Nine of the 10 most-active currencies in Asia outside Japan gained against the U.S. currency today. Indonesia's rupiah rose 0.2 percent to 9,060 per dollar and the Singapore dollar touched an 11-year high of S$1.3995. The Chinese yuan advanced 0.2 percent to 7.1462.

Thailand's baht advanced to the highest since August 1997 as the central bank kept its benchmark interest rate unchanged. The currency rose 0.4 percent to 32.13 per dollar. Bank of Thailand maintained its one-day bond repurchase rate at 3.25 percent for a fifth straight meeting.

Dollar Index

The dollar will tumble to a record low against the currencies of major trading partners ``within weeks'' as the Fed lowers rates to prevent a recession, Bank of America N.A. analysts said in a research note dated today.

The currency will continue to trade below $1.50 for the next few weeks, Robert Sinche, head of global currency strategy at the New York-based bank, wrote in the report. An index traded on ICE Futures in New York, which tracks the currency against its six major counterparts, fell as much as 0.5 percent to 74.386, the lowest since the gauge started trading in 1973.

``It's crunch time for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value. ``Bernanke may know that monetary policy alone cannot support the slowing U.S. economy.''

The U.S. currency may fall to $1.51 today, Saito forecast.

New home sales dropped 0.7 percent to an annual pace of 600,000 last month, the lowest level in almost 13 years, according to median forecast in a Bloomberg News survey. The Commerce Department's report is due at 10 a.m. in Washington.

Dollar Forecasts

The dollar will rebound to $1.48 per euro by the end of March, according to the median forecast in a Bloomberg survey of 41 analysts. Merrill Lynch & Co., the third-biggest U.S. securities firm, is the most bearish, predicting it will fall to $1.57 per euro by March-end.

Options show the dollar is unlikely to fall rapidly against the euro after its decline to a record low, said Takeharu Miki, currency options manager at Bank of Tokyo-Mitsubishi UFJ Ltd.

The premium on one-month dollar call options over put options, known as the risk reversal rate, was unchanged from yesterday, showing traders aren't increasing bets on a decline in the currency, said Tokyo-based Miki. Calls grant the right to buy and puts grant the right to sell.

Futures on the Chicago Board of Trade show traders see a 96 percent chance the U.S. central bank will reduce the 3 percent target rate for overnight lending between banks by 50 basis points at their March 18 meeting, and a 4 percent likelihood of a quarter-point cut.

Business Confidence

The euro also gained as a government report showed import prices in Germany, an early indicator of inflation pressure in the region's biggest economy, rose the most in 16 months in January.

The single currency was boosted yesterday after the Munich- based Ifo institute said its business climate index unexpectedly strengthened for a second month in February. Traders pared bets the European Central Bank will lower its benchmark rate from a six-year high of 4 percent.

``Germany's business sentiment was unexpectedly strong,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``The ECB is likely to keep borrowing costs unchanged.''

The euro may rise to 161.40 yen today, Muramatsu forecast.

The odds of the ECB lowering borrowing costs fell yesterday, with the implied yield on the Euribor futures contract for June rising 4 basis points to 4.15 percent. The yield averaged 0.18 percentage point more than the ECB's benchmark from 1999 until August. A basis point is 0.01 percentage point.

BLOOMBERG