Monday, December 31, 2007

Not so funny money

Dollar Posts Biggest Decline Versus Euro Since 2006 on Housing

By Min Zeng

The dollar posted its biggest weekly drop against the euro since April 2006 as a slumping housing market and upheaval in Pakistan made U.S. financial assets less attractive to international investors.

The U.S. currency fell against all 16 most-actively traded currencies except Mexico's peso this week as traders raised bets that the Federal Reserve will cut borrowing costs in January. The dollar has lost 10.4 percent against the euro and 5.7 percent versus the yen in 2007, and the European currency is up 5.2 percent versus the yen, its eighth annual increase.

``The dollar is like a sore thumb getting hit by a hammer,'' said Brian Dolan, chief currency strategist at, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. ``U.S. housing data shows no signs of any bottom in sight.''

The U.S. currency fell 2.4 percent this week to $1.4723 per euro, 1.5 percent to 112.28 yen and 2.5 percent to 1.1263 Swiss francs. The dollar touched $1.4728 per euro, 112.28 yen and 1.1259 Swiss francs, the lowest levels since mid-December.

Sweden's krona and Norway's krone led gains against the dollar this week, rising more than 2.8 percent. The Australian currency advanced 0.5 percent, the pound strengthened about 1 percent and the New Zealand currency increased 1 percent.

The U.S. currency weakened yesterday after the Commerce Department reported that sales of new homes in the U.S. fell to a 12-year low last month. Purchases dropped 9 percent to an annual rate of 647,000, and October sales were revised down to a 711,000 pace.

Home Prices

Home prices in 20 U.S. metropolitan areas decreased 6.1 percent in October, the S&P/Case-Shiller home-price index showed Dec. 26. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Investors also sold the dollar after former Prime Minister Benazir Bhutto died of injuries sustained in a Dec. 27 attack on an election rally in Pakistan. She was buried yesterday in her ancestral village, and troops were deployed to quell riots in several cities. The government said al-Qaeda may be behind Bhutto's killing and ordered a judicial inquiry.

``The combination of soft U.S. data and geopolitical risks led to dollar weakness,'' said Richard Franulovich, a senior currency strategist in New York at Westpac Banking Corp. ``Data from the U.S. continued to show weakness.''

The pound fell to a record low of 73.89 pence per euro yesterday after a U.K. report showing falling house prices increased speculation that the Bank of England will cut interest rates from 5.5 percent. The pound lost 1.8 percent against the euro this week, the most since September.

Swiss Franc

The Swiss franc increased against 14 of the 16 most actively traded currencies this week, and the yen rose against the dollar, pound and currencies in Brazil, New Zealand and Australia on speculation the upheaval in Pakistan will lead to a reduction of carry trades funded in Switzerland and Japan.

In a carry trade, investors borrow in countries with low interest rates and convert the proceeds into currencies they can lend out for a higher return. They earn the spread between the borrowing and lending rates, incurring the risk that currency fluctuations may erase their profits.

Japan's benchmark lending rate is 0.5 percent and Switzerland's is 2.75 percent, the lowest among major economies.

``The Swiss franc is traditionally considered a safe-haven currency, and geopolitical risks pushed people to cut carry trades,'' said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co.

For the year, the dollar has declined against 14 of the 16 most actively traded currencies as the Fed cut the target rate for overnight lending between banks three times to 4.25 percent.

Payroll Report

A Labor Department report on Jan. 4 will show U.S. employers added 70,000 jobs this month, down from 94,000 in November, according to the median forecast of 58 economists surveyed by Bloomberg News. The unemployment rate is expected to rise to 4.8 percent in December from 4.7 percent.

Interest-rate futures on the Chicago Board of Trade yesterday indicated 94 percent odds that the Fed will reduce its benchmark interest rate a quarter-percentage point at its Jan. 30 meeting, compared with a 76 percent chance a day earlier and 80 percent a week ago.

``In the near term, the dollar probably remains on the weak side,'' said Doug Smith, chief Americas economist in New York at Standard Chartered Bank.

The dollar's share of global foreign-exchange reserves fell to 63.8 percent last quarter, the lowest level since records began in 1999, as international demand for U.S. assets slumped after the subprime-mortgage market collapsed, the International Monetary Fund said yesterday in Washington.

The U.S. currency will rebound to $1.39 per euro by the end of 2008, according to the median forecast of 42 economists surveyed by Bloomberg News. The yen will trade at 110 per dollar, according to the survey.

To contact the reporter on this story: Min Zeng in New York at

Original article posted here.

No comments: