Dollar Near Three-Week Low Versus Yen; Fed May Keep Rates Low

June 24 (Bloomberg) -- The dollar traded near a three-week low against the yen on speculation the Federal Reserve will today signal it intends to refrain from raising interest rates this year as policy makers attempt to revive economic growth.

The greenback fell the most in six weeks against the euro yesterday as traders added to bets the Federal Open Market Committee will keep the benchmark rate unchanged at 0.25 percent at the end of its policy meeting today. The dollar also weakened as European Central Bank council member Axel Weber said policy makers have already used up their room to cut borrowing costs, indicating the euro-area’s benchmark rate will stay higher than the equivalent U.S. rate

“People are looking for guidance on what the Fed thinks about green shoots,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Probably right after the Fed’s statement, the U.S. dollar will stay weak. But I’m not convinced it will weaken indefinitely.”

The dollar traded at 95.34 yen as of 8:56 a.m. in Tokyo from 95.22 yesterday in New York when it fell to 94.88, the weakest level since June 1. The U.S. currency was at $1.4065 per euro from $1.4077 yesterday, when it dropped 1.5 percent, the most since May 29. Japan’s currency was at 134.13 versus the euro from 134.04.

The Fed will probably keep its interest-rate target for overnight loans between banks close to zero and continue its $300 billion program of Treasury purchases, according to a Bloomberg News survey of economists before today’s statement.

‘Damper on Yields’

“The market is worried that the Fed will put a damper on yields and that will take away support from the dollar,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader. “That’s the main reason the dollar looks vulnerable right now.”

Rates on U.S. 10-year notes and 30-year mortgages rose to 4 percent and 5.59 percent on June 11, the highest this year. The increases threaten the Fed’s plans to free up lending in credit markets by purchasing debt ranging from government notes to mortgage-backed securities.

The dollar will be “biased to weaken” after this week’s Fed policy meeting, according to Credit Suisse Group AG.

“The dollar’s immediate problem is market concern about the Fed’s inflation-fighting credibility,” a team of Credit Suisse currency strategists led by Ray Farris in London wrote in a note yesterday, referring to the Fed’s purchases of assets. “We see ways for the Fed to salve some of these concerns, but we doubt the Fed will turn hawkish enough to support the dollar.”

ECB Rates

The dollar also fell to the lowest in more than a week against the euro yesterday as the ECB’s Weber said the scope for interest-rate cuts created by the “dramatic worsening” in the economy and decline in inflation risk has been used up.

“The rate differentials will move once again in favor of the euro” as the odds drop for a Fed rate increase this year, said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt.

The yen weakened earlier after a Japanese report showed exports fell at a faster pace in May. Shipments abroad dropped 40.9 percent from a year ago, compared with April’s 39.1 percent decline, the Finance Ministry said today in Tokyo.