Dollar Trades Near Two-Month Low on Outlook for Fed Rate Cut

Dec. 16 (Bloomberg) -- The dollar traded near a two-month low against the euro on speculation the Federal Reserve will cut the target rate for overnight lending to the lowest on record.

The greenback approached a 13-year low against the yen yesterday before the release of a U.S. Commerce Department report forecast by economists to show housing starts dropped last month to the lowest level since records began in 1959. The dollar dropped versus the pound and the Danish krone on reduced demand for the greenback as a haven.

“We will stay in a low-interest-rate environment for some time,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York. “That will take away interest-rate play, and the dollar will suffer.”

The dollar traded at $1.3698 per euro at 7:04 a.m. in Tokyo, after falling 2.3 percent yesterday and touching $1.3710, the weakest level since Oct. 14. The dollar was quoted at 90.64 yen following a 0.6 percent decline. It dropped to 88.53 yen on Dec. 12, the lowest level since August 1995. The euro traded at 124.16 yen after increasing 1.9 percent.

The ruble fell as much as 2.2 percent to a four-year low of 37.8611 per euro after Russia’s central bank devalued the currency for a second time in a week yesterday. Against the dollar, the ruble traded at 27.6130. Russia has drained 27 percent of its reserves, the world’s third-largest, trying to stem a 16 percent decline in the currency against the dollar since August.

Dollar This Year

The dollar slid 2.2 percent to $1.52979 against the pound and 2.3 percent to 5.4465 Danish krone yesterday as the cost of borrowing in the greenback tumbled to the lowest in more than four years. The three-month London interbank offered rate, or Libor, for dollars fell for a fifth day, decreasing 0.05 percentage point to 1.87 percent, the lowest level since September 2004, according to British Bankers’ Association data.

The greenback’s drop versus the euro accelerated yesterday when it broke through $1.36, Bloomberg data show. That level is the edge of an Ichimoku “cloud” in which orders to sell the euro were clustered, according to Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. Ichimoku was the pen name of a Japanese journalist who developed the charting system.

“This is real rip-roar dollar selling going on,” Dolan said. “We’ve blown through a number of key levels.” The next critical level of so-called resistance is $1.3820, Dolan said.

The dollar gained 6.8 percent against the euro this year, 30 percent versus the pound and 6.7 percent against the krone as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.

Euro Net Shorts

Traders decreased their bets that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 16,668 on Dec. 9, compared with net shorts of 20,197 a week earlier.

Futures on the Chicago Board of Trade showed a 66 percent chance the Fed will trim its 1 percent target rate for overnight lending between banks today to 0.25 percent, the all-time low, compared with zero odds a month ago. Such a reduction would mean the fed funds target would trail Japan’s 0.3 percent benchmark, the lowest in the industrialized world.

‘Further’ Fed Action

“Expectations are strong that we will see further action from the Fed,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “The yield differential is turning less in favor of the dollar.”

The housing recession that triggered the credit crisis and the ensuing recession shows no signs of abating. New-home starts in November dropped to a 736,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast by economists to report before the Fed’s decision.

The dollar extended its drop versus the pound and the Danish krone after the U.S. Treasury reported yesterday that international demand for long-term U.S. financial assets weakened in October as foreign investors sold American stocks, corporate bonds and agency debt.

Total net purchases of long-term equities, notes and bonds fell to a net $1.5 billion in October from $65.4 billion the previous month, the Treasury said in Washington. Including short-term securities such as stock swaps, foreigners bought a net $286.3 billion, compared with net buying of $142.6 billion the previous month.