Dollar Heads for Third Weekly Loss Against Euro


The dollar headed for the biggest weekly loss in almost four years against the Canadian dollar and a third decline against the euro on speculation the Federal Reserve will keep cutting U.S. interest rates.

The U.S. currency dropped to an all-time low versus the euro today, falling against 15 of the 16 most-active currencies this week. Fed Chairman Ben S. Bernanke said yesterday the credit market turmoil may make the housing recession more severe. The central bank's trade-weighted dollar index was at its lowest since its inception in 1971.

``The dollar weakness will drag on,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. ``The crisis is not over and the Fed is likely to cut rates further.''

The U.S. currency traded at $1.4048 per euro at 8:18 a.m. in New York, from $1.4064 late yesterday and $1.3875 last week. It rebounded from a record low of $1.4120 today, extending gains after a report showed Europe's manufacturing and service industries grew at the slowest pace in two years this month.

The dollar has lost 6.6 percent against the euro this year.

The currency fell as low as $1.0064 per Canadian dollar, the weakest since November 1976, bringing its loss this week to 3.1 percent. The dollar rose to 115.61 yen, from 114.75 yesterday and 115.36 a week ago. The pound headed for a third straight weekly drop against the euro, trading at 69.74 pence per euro.

The yen fell today against the 16 most-active currencies on signs investors have resumed purchases of higher-yielding assets funded by loans in Japan. It declined the most against the New Zealand dollar, dropping 1 percent to 85.49 yen from 84.61 yesterday and 82.25 last week.

Rate Outlook

The Fed cut its interest rate half a point to 4.75 percent to prevent the collapse of the subprime-mortgage market from pushing the world's largest economy into recession. The European Central Bank's rate is 4 percent, while the Bank of Canada's is 4.5 percent.

Futures contracts show 72 percent odds of a quarter- percentage point cut to 4.5 percent at the Fed's next meeting on Oct. 31. Jim O'Neill, head of global economic research at Goldman Sachs Group Inc., predicts the Fed will cut rates to 4 percent by early next year.

Fed officials including Vice Chairman Donald Kohn and Governor Kevin Warsh are scheduled to speak on monetary policy today. Bernanke told lawmakers yesterday the central bank is ``actively working'' to avoid a repeat of the losses on subprime- mortgage debt that resulted from increasing foreclosures and delinquencies on the part of borrowers with poor credit.

Weakness Story

``The broader U.S. dollar weakness story is firmly back on the table,'' said Paul Milton, chief dealer at Societe Generale SA in Sydney. ``Underlying this week's moves was the Fed decision and the market should focus on U.S. fundamentals.''

The dollar may fall to $1.42 per euro in the next few days, he said.

Oil prices held near a record high of $83.90 a barrel because of a storm threat in the eastern Gulf of Mexico. Since early 2002, the correlation between oil and the dollar has been negative, indicating that when oil rises, the dollar falls.

The euro erased its gains today after Royal Bank of Scotland Group Plc said a preliminary estimate of its services and manufacturing index fell to 54.5 in September from 57.4 in August. That's the lowest since September 2005 and below the 56.9 median of 15 forecasts in a Bloomberg News survey. A reading above 50 indicates growth.

Spilling Over

``The policy makers will take this seriously,'' said Gareth Claase, an economist at RBS in London. ``They have been looking for signs that it's spilled over into the economy.''

Two of Italy's top executives said today the strong euro is threatening to curtail exports and economic growth. Fiat Chairman Luca Cordero di Montezemolo urged the ECB to halt the currency's advance and Paulo Scaroni, chief executive officer of Europe's fourth-biggest oil company, Eni SpA, said the strong euro isn't helping the Italian economy.

ECB council membe...


Bloomberg
9/21/2007 5:50:57 AM