–The Euro...The New World Currency?

Dollar Heads for Third Weekly Loss Versus Euro on Fed Rate Bets
By Min Zeng

The dollar headed for a third straight weekly loss against the euro as speculation the Federal Reserve will continue to cut interest rates reduces the appeal of U.S. assets among international investors.

The U.S. dollar has dropped versus all 16 most-actively traded currencies this week after the Fed's first reduction in borrowing costs since 2003. The dollar fell to a record low against the euro yesterday while the Canadian currency reached par with its U.S. counterpart for the first time since 1976.

``There is no end in sight for dollar selling,'' said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, the world's largest custodian bank with over $20 trillion in assets under administration. ``The interest- rate differential will continue to move against the dollar.''

The U.S. currency traded at $1.4064 per euro and 114.75 yen at 6 a.m. in Tokyo. The dollar touched $1.4098 per euro yesterday, the weakest since the European currency's introduction in January 1999.

The dollar has lost 1.3 percent this week against the euro, extending its loss this year to 6.2 percent. The dollar will fall to $1.42 per euro by the end of October, Woolfolk said.

The New Zealand dollar led the advance among the 16 major currencies this week, gaining 3.3 percent versus the U.S. dollar. The Canadian dollar has increased 2.8 percent. The U.S. dollar dropped 2.2 percent against the Australian dollar, 0.7 percent versus the yen and 1.4 percent against the Swiss franc over the same period.

4.75 Percent

The Fed on Sept. 18 cut its benchmark interest rate half a point to 4.75 percent. The European Central Bank's rate is 4 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.

Fed officials including Vice Chairman Donald Kohn, Governor Frederic Mishkin and Governor Kevin Warsh are scheduled to speak on monetary policy today. Fed Chairman Ben S. Bernanke told lawmakers yesterday that the central bank is ``actively working'' to avoid a repeat of the subprime-mortgage rout.

``It seems like the world is dumping the dollar,'' said John Taylor, chairman of FX Concepts Inc., a New York firm that manages $12.1 billion in currencies. ``We have sold the dollar and will continue to do so. My preference is to sell the dollar against European currencies.''

The New York Board of Trade's dollar index comparing the U.S. currency against its six primary peers, including the euro and yen, touched 78.450 yesterday, the lowest since September 1992. The Fed's major currency trade-weighted dollar index dropped to 75.73 on Sept. 19, the weakest since its inception in 1971.

Greenspan on Recession

Former Fed Chairman Alan Greenspan said in an interview yesterday the odds of a recession remain ``somewhat more'' than one in three, even after this week's cut in interest rates, with home prices likely to drop further and hurt consumer spending.

The dollar's decline pushed gold to a 27-year high yesterday. The spread between two- and 10-year Treasury note yields widened yesterday to the most since May 2005 on speculation that the tumbling dollar and Fed interest-rate cuts will fuel inflation. Crude oil touched a record $83.90 a barrel.

The weakening dollar is bolstering U.S. exports, which reached records in each of the past five months as Boeing Co., General Electric Co. and Deere & Co. shipped more airplanes, engines and tractors overseas. The trade deficit narrowed 0.3 percent to $59.2 billion in July from a revised $59.4 billion during June, the Commerce Department said Sept. 11.

``People are selling the dollar because they believe that the Fed's aggressive actions on interest rates are a move to reflate the U.S. economy to help alleviate the debt overhang,'' said Robert Robis, an international fixed income portfolio manager at OppenheimerFunds Inc. in New York, which manages $250 billion. ``Expect further dollar weakness going forward.''

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net  .