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Dollar Falls to Record Versus Euro; Credit Woes May Damp Growth

By Agnes Lovasz and Kosuke Goto

 July 15 (Bloomberg) -- The dollar declined to a record low against the euro on speculation Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson will say credit- market losses are hurting U.S. economic growth.

The currency also weakened to the lowest level in more than a month against the Japanese yen and to a 25-year low versus the Australian dollar on concern confidence in the debt of Fannie Mae and Freddie Mac will diminish even after the U.S. government pledged support for the two-largest buyers of home loans. The pound surpassed $2 for the first time since July 1 after U.K. inflation quickened to the fastest pace in at least 11 years.

``The markets are reacting negatively to the renewed credit crisis in the U.S. and that's hurting the dollar across the board,'' said Roberto Mialich, a Milan-based currency strategist at Unicredit Markets & Investment Banking, a unit of Italy's largest lender. ``The market is speculating that Bernanke will offer a gloomy outlook for the U.S. economy.''

The dollar fell to $1.6038 per euro, the lowest since the euro's inception in 1999, and was at $1.6006 as of 7:22 a.m. in New York, from $1.5908 yesterday. The U.S. currency also dropped to 104.61 yen, the lowest level since June 9, from 106.14 yen yesterday. The yen traded at 167.69 per euro, from 168.89 yesterday, when it weakened to 169.75, the lowest since the single currency's debut.

The dollar may fall to between $1.62 and $1.63 in the coming month, Mialich said.

Given Up Gains

The U.S. currency has given up all the gains made versus the euro since July 3, when European Central Bank President Jean-Claude Trichet said he has ``no bias'' on future interest- rate moves.

The dollar rose as much as 1.7 percent to $1.5611 per euro that week. It has since slumped as much as 2.7 percent as concern increased that Fannie Mae and Freddie Mac, which buy or finance almost half the $12 trillion of U.S. mortgages, would need to be rescued by the U.S. government.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, fell for a fifth day on the ICE market to 71.334, the lowest since April 23, from 71.915.

Bernanke will give his semiannual testimony on monetary policy and the economy before the Senate Banking Committee at 10 a.m. Washington time. A separate hearing at the committee with Paulson, and Securities and Exchange Commission Chairman Christopher Cox on financial markets, is scheduled for about 11:30 a.m.

``The reality is the U.S. housing market and credit squeeze haven't hit bottom yet,'' said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ``That's discouraging investors from holding dollar assets.''

Losses and Writedowns

Global banks and securities firms have reported losses and writedowns of more than $400 billion as the subprime-mortgage market collapsed.

The British pound was bolstered by expectations accelerating inflation will keep the Bank of England from lowering interest rates to avert a recession.

Consumer prices climbed 3.8 percent from a year earlier, exceeding the government's 3 percent upper limit for a second month and the highest level since records began in 1997, the Office for National Statistics said today in London. Economists forecast 3.6 percent, according to the median of 36 estimates in a Bloomberg News survey. The pound was at $2.0107, from $1.9951 yesterday.

Japan Rates

The Swiss franc rose to within half a cent of parity with the U.S. dollar and the Japanese yen strengthened as investors reversed purchases of higher-yielding assets financed with loans in Switzerland and Japan.

Against the dollar, the franc rose as much as 1.4 percent to 1.0021 before trading at 1.0044, from 1.0161 yesterday.

The yen stayed higher after the Bank of Japan kept interest rates at 0.5 percent today, the lowest among major economies, as expected by all 39 economists surveyed by Bloomberg News.

The world's second-largest economy will grow 1.2 percent in the year ending March 31, slower than the 1.5 percent forecast on April 30, the central bank said in a statement in Tokyo. Consumer prices excluding fresh food will climb 1.8 percent, more than the 1.1 percent projected three months ago, it said.

Dollar at 100 Yen?

The yen may rise as high as 100 per dollar this year as the Bank of Japan is more likely to raise interest rates than the Federal Reserve, said Toyoo Gyohten, former currency-policy chief at Japan's Ministry of Finance.

Japan's central bank may increase borrowing costs should inflation accelerate and the economy sustain growth of at least 1 percent, Gyohten said.

``The Fed is most likely to maintain its current level of interest rates,'' Gyohten, president for the Institute of International Monetary Affairs in Tokyo, said in an interview yesterday. ``The BOJ is more likely to raise rates. The medium- term trend is for a weaker dollar and a stronger yen.''

U.S. stocks fell yesterday, led by financial shares, after the government's seizure of Pasadena, California-based IndyMac Bancorp Inc. and predictions of wider credit losses overshadowed Paulson's pledge to shore up Fannie and Freddie. The Standard & Poor's 500 Index declined 0.9 percent.

The dollar may extend declines on concern Fannie Mae and Freddie Mac will get the majority of funds they need by borrowing from the Fed rather than an investment from the government, increasing supply of the U.S. currency, said Ashley [=^]Davies[^=], a currency strategist in Singapore at UBS AG, the world's second-biggest currency trader.

Trigger Declines

``Any whiff that the authorities will adopt steps to monetize the problems facing the U.S. housing market would be the trigger to drive the euro-dollar'' higher, [=^]Davies[^=] wrote in a report today.

Against Australia's currency, the dollar weakened to 98.39 cents, the lowest level since 1983, from 97.18 cents yesterday.

Gains in the euro were limited after a report showed investor confidence in Germany, Europe's largest economy, fell to a record low in July, weakening the case for higher rates.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 63.9 in July from minus 52.4 the previous month. Economists expected a decline to minus 55, according to the median of 37 forecasts in a Bloomberg News survey.

Inflation Report

``For the dollar to drop abruptly from here is unwarranted,'' said Robert Minikin, a senior currency strategist at Standard Chartered Plc. ``We don't think the U.S. economy, or the financial system, is uniquely vulnerable. We see a lot of negative news on the U.K. and the euro zone economies. The balance of risks is tilted towards a recovery.''

The dollar may rise to $1.5750 in coming weeks and strengthen to $1.56 by the end of this quarter, Minikin said.

Losses in the dollar may be limited by speculation reports will show inflation accelerated, spurring traders to add to bets the Fed will raise its benchmark interest rate from 2 percent.

U.S. producer prices increased 8.7 percent from a year earlier in June, the most since 1981, according to a Bloomberg News survey of economists before a Labor Department report today. A report tomorrow will show consumer prices rose 4.5 percent in June, the most since September 2005, according to a separate Bloomberg survey.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: July 15, 2008 07:50 EDT