Dollar Declines

The dollar fell to a two-month low against the euro on speculation the Federal Reserve will cut the target lending rate to near zero today.

The U.S. currency dropped for a fifth day, the longest stretch of losses since February, as the central bank considered deploying its balance sheet as the key tool for monetary policy. European Central Bank President Jean-Claude Trichet said there’s a limit to how far the bank can cut borrowing costs and signaled it may pause in January.

The dollar slid 0.6 percent to $1.3772 per euro at 10:27 a.m. in New York, from $1.3688 yesterday, after touching $1.3776, the weakest level since Oct. 9. The dollar decreased 0.9 percent to 89.85 yen from 90.65. It reached 88.53 yen on Dec. 12, the lowest level since August 1995. The euro dropped 0.3 percent to 123.74 yen from 124.09.

Futures on the Chicago Board of Trade showed a 64 percent chance the Fed will trim its 1 percent target rate for overnight lending between banks to 0.25 percent, the lowest level on record, compared with no likelihood a month ago. The balance of bets is for a reduction of a half-percentage point.

The dollar remained lower versus the yen after the U.S. Commerce Department reported today in Washington that construction starts on housing fell last month to an annual rate of 625,000, the lowest level since the government started compiling statistics in 1959.

Consumer prices dropped 1.7 percent in November, the most since record keeping began in 1947, the Labor Department said. Excluding food and energy, so-called core prices were unchanged from a month earlier.

The euro fell earlier against the dollar as reports showed European manufacturing and service industries contracted this month at the fastest pace in at least a decade.

A composite index of factory and non-factory industries dropped in December to 38.3, the lowest level since a survey began in 1998, from 38.9 last month. The index is based on a survey of purchasing managers by Markit Economics in London. A reading below 50 indicates contraction.

The U.S. currency gained 6.3 percent versus the euro and 29 percent against the pound this year on short-term funding pressure and demand for the greenback as a haven., Bloomberg
12/16/2008 7:46:11 AM