Greenback falls below 96 yen to 12-year low on sub-prime losses

The dollar fell below 96 yen for the first time in 12 years earlier today after the Federal Reserve's emergency weekend cut in its discount interest rate and the sale of Bear Stearns Cos. to JPMorgan Chase & Co.

The dollar dropped to a record low against the euro and the Swiss franc as the Fed made its first weekend change in borrowing costs since 1979 and Bear Stearns was acquired for less than a 10th of its March 14 value. Traders are betting the Fed will slash its benchmark rate by at least 1 percentage point tomorrow to stem a slump in confidence in financial markets, interest-rate futures show.

"I find it outrageous that the Fed is just throwing the dollar out of the window," Jim Rogers, chairman of Rogers Holdings, co-founder of the Quantum Hedge Fund with George Soros, said in a Bloomberg Television interview. "They are signaling to the whole world that they have given up on the dollar. Most of my US dollar assets are gone."

The dollar fell to as low as 95.76 yen, the weakest since August 15, 1995, before trading at 96.83 yen at 9:16 a.m. in New York, from 99.09 yen on March 14. Against the euro, the dollar dropped to $1.5903, the weakest since the creation of the single European currency in 1999, and was at $1.5751 from $1.5674. It slid to a record 0.9638 Swiss francs.

The Australian and New Zealand dollars fell on speculation investors will spurn higher-yielding currencies as financial turmoil deepens. Australia's currency declined to 92.12 US cents from 93.74 cents. The New Zealand dollar weakened to 80.15 US cents from 81.34 cents.

Pound record low
The British pound dropped the most in six years against the euro as concern that credit losses will widen reduced demand for higher-yielding currencies. It touched 79.12 pence, the lowest level since the euro's 1999 inception, and was last at 78.61, from 77.58 pence on March 14. It fell to $2.0051 from $2.0202.

Stocks in Asia and Europe tumbled and Standard & Poor's 500 futures pointed to losses at the start of trading in New York.

Volatility implied by one-month dollar-yen options earlier reached 24 per cent, the highest since January 1999. Traders quote the gauge of expected swings in exchange rates when pricing options.

"The dollar is facing a credibility crisis," said Koji Fukaya, a senior currency strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. "All the markets are entering a vicious cycle."

'Excessive' moves
Recent moves by the yen are "excessive", Japan's Finance Minister Fukushiro Nukaga said. The government isn't considering any specific action at the moment, he said.

Goldman Sachs Group Inc and Morgan Stanley strategists say that coordinated action by policy makers to curb the dollar's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates.

Investors should sell dollars for yen because of stress in the financial system, Goldman Sachs analysts Thomas Stolper and Jens Nordvig, wrote in a note today. "Risk aversion, falling rate differentials and potentially large shifts in corporate hedging behavior suggest the yen could rally further," they wrote.

The US currency has lost about 16 per cent against the euro and 17 per cent versus the yen in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate 2.25 percentage points. The Fed lowered the rate it charges commercial banks for loans by a quarter-point to 3.25 per cent in early Asian trade.

'Temporary impact'
The dollar remained lower after a Fed report showed manufacturing in New York fell to the lowest level on record in March. The New York Fed's general economic index sank to minus 22.2, from minus 11.7 the previous month, the bank said. US industrial production shrank 0.5 per cent in February, after 0.1 per cent growth the prior month, a separate Fed report showed.

International investors added a net $37.4 billion of US securities in January, slowing from a net $72.7 billion the prior month, the Treasury said today.

Currency valuations have become stretched and "the main medium-term risk is now towards a higher dollar rather than a lower one, at least against the euro and the higher yielders", Adrian Schmidt, senior currency strategist in London at Royal Bank of Scotland Plc, the fourth-biggest currency trader, said in a note to clients. "While there will be some reluctance to intervene, the risk is increasing and above $1.60 would become severe."

A technical gauge shows the euro may have risen too far and too fast against the dollar. The Relative Strength Index was at 85 today and has stayed above the 70 level, which signals it may be bound for a reversal, for two weeks. The index for dollar-yen was 21.2, its lowest since November, signaling it may rebound.

Buy call options
Schmidt advises buying one-year dollar call options against the euro, pound and Australian dollar, citing the increased likelihood of coordinated central bank measures to halt the dollar's decline. A call option gives investors the right to buy the currency at a specific price within a given time.

Traders saw a 100 per cent likelihood the Fed will cut its target rate for loans between banks by at least 1 percentage point to 2 per cent at tomorrow's meeting, according to futures on the Chicago Board of Trade.

The dollar is the weakest since at least 1971 based on a Fed trade-weighted index, helping push oil, grains and metals, which are priced in the US currency, to record highs. That in turn is causing economists to lower growth forecasts for the US and preventing central banks, concerned that inflation is accelerating, from cutting rates, further hurting the dollar.

'Relative return'
"The relative return on US assets is not attractive enough and we have moved back into looking for dollar weakness," said Robert Robis, a bond fund manager in New York at OppenheimerFunds Inc, which oversees $260 billion. Robis last month was betting the dollar would rally versus the euro.

JPMorgan Chase bought Bear Stearns for about $240 million after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Goldman Sachs will reveal $3 billion in writedowns when it releases quarterly earnings tomorrow, the Daily Telegraph reported yesterday, without saying where it got the information. Lehman Brothers Holdings Inc, which obtained a $2 billion credit line on March 14 to improve its finances, also releases earnings tomorrow.