Dollar Slumps to Record Low Versus Euro on Bear Stearns Losses

Date: Wednesday, July 18, 2007
Author: David McIntyre and Stanley White, Bloomberg

July 18 (Bloomberg) -- The dollar fell to a record low against the euro and dropped versus the yen after Bear Stearns Cos. reported hedge fund losses, fueling speculation investors will spurn U.S. assets as the economy slows.

The yen also rose against the euro, British pound and New Zealand dollar as investors scaled back carry trades, where they buy higher-yielding securities with money borrowed in Japan. Financial industry losses caused by subprime mortgage defaults may be addressed by Federal Reserve Chairman Ben S. Bernanke when he testifies to Congress today.

``The subprime woes may weigh on the broader U.S. economy,'' said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. ``There's a bias for selling the dollar.''

The dollar declined to an all-time low of $1.3833 against the euro from $1.3781 in New York yesterday, and traded at $1.3809 at 7:47 a.m. in London. It dropped to 121.71 yen from 122.34. The yen rose to 168.09 per euro from 168.59. The U.S. currency may decline to $1.3830 per euro and 121.50 yen today, Saito said.

The dollar fell against 13 of the 16 most-active currencies today after Bear Stearns told investors in one of its hedge funds they won't get any money back. It reached a 26-year low of $2.0548 against the pound and weakened to 87.85 cents against the Australian dollar, the lowest since February 1989.

Taking a Hit

Defaults on loans by homeowners with poor credit histories have deepened a housing slump that threatens to restrain growth in the world's biggest economy. U.S. data today will show builders broke ground at an annual pace of 1.45 million new homes last month, down from 1.474 million in May, according to a Bloomberg survey.

Interest-rate futures today showed 30 percent odds the Fed will lower borrowing costs from 5.25 percent in December, up from a 21 percent chance yesterday. Bernanke delivers his semi-annual testimony on the U.S. economy to the House at 10 a.m.

``Sentiment for the dollar is taking a hit,'' said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo. ``Bernanke will try to sound reassuring. He can't say anything definitively because even the Fed doesn't know what's going to happen with subprime loans. Growing expectations for a rate cut hurt the dollar.''

The U.S. currency may fall to $1.40 against the euro this month, he said.

New Stage

The Fed's trade-weighted dollar index this week fell to the lowest since its inception in 1971. The U.S. Trade Weighted Major Currency Index, measuring the dollar's performance versus seven currencies, fell to a record low of 77.24 on July 16 and was at 77.29 yesterday, down 1.8 percent for the year. The central bank's broad dollar index, which includes 26 currencies, dropped to the lowest since July 1997.

``Breaking through those levels marks a new stage of the week dollar trend,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``The dollar's depreciation may accelerate.''

The yen recovered from a 21-year low against the New Zealand dollar to trade at 96.50 from 96.63. It rebounded from a 15-year trough against the pound to 249.95 from 250.40 late yesterday.

Investors have favored New Zealand and the U.K. for carry trades because the two countries have interest rates as much as 7.5 percentage points higher than Japan's.

``The yen is rising on an unwinding in carry trades,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Bear Stearns latest woes are sparking risk aversion. This isn't just about Bear Stearns. Other hedge funds may be suffering just as much.''

The yen may rise to 121.70 per dollar today, Soma said.

Wait Until September

Any gains in the yen may be limited by speculation the Bank of Japan will delay raising interest rates while it gauges the impact of subprime loan defaults. The U.S. is Japan's largest export market.

Some BOJ board members said it's necessary to watch the U.S. housing market, according to minutes released today from a meeting held June 14-15. Some policy makers also said lower oil prices are placing ``stronger downward pressure'' on consumer prices, the minutes showed.

The central bank's nine board members voted unanimously at that meeting to leave interest rates at 0.5 percent. The BOJ decided 8-1 to keep policy on hold at a meeting July 12.

``The market has priced in a rate increase in August, but the BOJ may not move until September,'' said Kengo Suzuki, a currency strategist at Shinko Securities Co. in Tokyo. ``The minutes show more uncertainty about the U.S. economy and Japanese inflation. The yen could be sold'' to 124 against the dollar and 174 per euro by year-end, he said.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net ; Stanley White in Tokyo at swhite28@bloomberg.net