Dollar near record low against euro on Fed cut

The dollar traded near a record low against the euro on speculation that signs of slowing US economic growth will prompt the Federal Reserve to cut interest rates, reducing the appeal of assets denominated in the US currency.

The dollar may have its longest losing streak since October 2004 as investors increase bets that the Fed will lower its target rate on September 18. A report today will probably show US jobless claims rose this month.

The euro also gained after a report showed that inflation in France, the second-largest of the 13 economies sharing the currency, unexpectedly quickened last month.

"We're still in a weak dollar environment,'' said Mitul Kotecha, head of currency strategy at Calyon in London. "Concerns about the US economy have intensified and that's played negatively for the dollar.''

The dollar was at $1.39 a euro at 8:04 am in New York, from $1.3904 yesterday, after trading at a record low of $1.3927. The dollar bought 114.78 yen, from 114.25.

The Labor Department in Washington will say initial jobless claims rose by 7,000 to 325,000 in the week ended September 8, according to a Bloomberg News survey of 43 economists. That may cause investors to raise bets the Federal Open Market Committee will trim the main lending rate next week from 5.25 per cent.

"The focal point for investors remains the FOMC meeting next week,'' said Kamal Sharma, a currency strategist at Bank of America in London. "The bias remains for a weak dollar.''

Interest-rate futures show 74 per cent odds policy makers will lower borrowing costs half a percentage point to 4.75 per cent. A month ago, traders expected a quarter-point cut. The equivalent rate in the euro region is 4 per cent.

The dollar's decline may be limited by speculation investors are overestimating the damage to the US economy from the housing slump, and the extent of future rate cuts.

"The market's probably a bit punchy in looking for 50 basis points in the next meeting,'' said Paul Robson, currency strategist at Royal Bank of Scotland Group.

The euro also pared gains as a report showed European payrolls growth eased in the second quarter, after the acceleration in pay in Germany, the continent's largest economy, more than halved.

Still, investors this week have increased bets that the European Central Bank will increase its key rate this year after the bank vowed to keep 'upside' inflation risks at bay. A report today showed prices in France rose by the most in four months.

"The medium-term outlook for price stability remains subject to upside risks,'' the Frankfurt-based ECB said in its monthly bulletin published today. "By acting in a firm and timely manner, the governing council will ensure that risks to price stability over the medium term do not materialise.''

ECB council member Guy Quaden said that a squeeze on credit caused by concern over losses linked to US subprime mortgages may have 'negative consequences' on the US economy.

Banks and companies are seeking to refinance about $700 billion of commercial paper in the US currency this week, analysts led by Michael Hart at Citigroup wrote in a research report on September 11.

Borrowers in the commercial paper market are struggling to sell new notes because of concern some of the short-term debt is linked to subprime-mortgage assets.

The implied yield on the December Euribor futures contract has risen 6 basis points since the end of last week and was at 4.51 per cent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 18 basis points above the ECB's key rate since 1999.

"Oil is surging, so there's an upside risk to inflation in Europe,'' said Hideaki Inoue, chief manager of derivatives and fixed-income investment at Mitsubishi UFJ Trust & Banking Corp in Tokyo. "The ECB is hawkish, so rates are likely to go up.'' The euro may rise to $1.3950 and 159.50 yen today, he said.

Crude for October delivery was at $79.92 a barrel on the New York Mercantile Exchange at 12:15 pm in London, after yesterday rising above $80 a barrel for the first time. Higher prices may increase import costs in the euro economy and raise pressure on the ECB to raise rates.

The yen weakened as Japanese investors put money into more than 2.4 trillion yen ($21 billion) of mutual funds marketed this month to lure investment in overseas assets, according to data compiled by Bloomberg.

New Zealand's central bank left its key rate at a record-high 8.25 per cent today, as predicted by all 14 economists surveyed by Bloomberg, pushing the yield spread with two-year Japanese bonds to 6.05 percentage points from 6.01 percentage points yesterday.

The Bank of Japan's key overnight lending rate of 0.5 per cent is the lowest among major economies. The benchmark rate is 6.50 per cent in Australia and 5.75 per cent in the UK.

"The speed may have slowed, but there are constant capital outflows by Japanese retail investors related to investment trust funds,'' said Junya Ota, who oversees the equivalent of about $7 billion at Mitsubishi UFJ Asset Management, a unit of Japan's largest lender. "This is stemming the yen's appreciation.''

The yen traded at 81.93 against New Zealand's dollar from 79.91 a week ago. It also was at 96.33 versus Australia's dollar from 95.66 on September 6 and at 232.46 a British pound from 231.84 yesterday. It may fall to 117 per US dollar by year-end, Ota forecast.

Japanese investors bought 1.4 trillion yen more foreign bonds than they sold during the week ended September 8, the most since October 2005, according to figures based on reports from designated major investors released today by the Ministry of Finance in Tokyo.