Dollar Falls Most Against Euro Since 1999

The dollar declined the most against the euro since the 15-nation currency’s 1999 debut and sank to a 13-year low versus the yen as near-zero interest rates and rising budget deficits led traders to abandon the greenback.

The dollar extended its drop against a gauge of currencies of six U.S. trading partners, falling 11 percent from a 2 1/2- year high reached Nov. 21. Investors including hedge funds reversed bets that the dollar will appreciate to minimize losses as the end of the year approached, traders said.

The dollar fell as much as 3 percent to $1.4437 per euro, the weakest level since Sept. 29, from $1.4002 yesterday, before trading at $1.4402 at 4:08 p.m. in New York. It was the biggest intraday drop since the euro’s inception. The U.S. currency decreased 1.8 percent to 87.43 yen from 89.05 and reached 87.14, the lowest since July 1995. The euro increased 0.9 percent to 125.81 yen from 124.71.

The pound weakened for the first time beyond 93 pence per euro after the Office for National Statistics said jobless claims rose last month at the fastest pace since 1991. Bank of England policy makers voted 9-0 to cut the nation’s benchmark on Dec. 4 to 2 percent, minutes showed. Sterling slid as much as 3.5 percent to 93.27 pence per euro. The pound dropped 0.4 percent to $1.5518.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 2.2 percent to 78.908. The dollar has given back about half of a rally in which it increased 24 percent from a low of 71.314 on July 15 to 88.463 on Nov. 21.

The Fed lowered its target rate yesterday to a range of zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The central bank reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying Treasuries, a policy known as quantitative easing.

The U.S. currency depreciated 21 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.

Central banks intervene when they buy or sell currencies to influence exchange rates. The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, propped up the dollar in 1995, when it declined to a post-World War II low of 79.75 yen.

The fed funds target was cut to below the BOJ’s rate for the first time since 1993. Japanese policy makers struggled in the 1990s to revive growth as deflation and recessions stranded the nation in what is known as the Lost Decade.

A dollar turnaround could come as early as the first quarter of next year as other central banks lower their interest rates, according to Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

Mexico’s peso declined for the first time in three days, dropping 0.2 percent to 13.0826 per dollar on concern the Fed may have few tools left to boost the global economy., Bloomberg
12/17/2008 1:19:43 PM