Dollar Falls on Bets 10.2% Unemployment Will Keep Fed Rate Low

Nov. 6 (Bloomberg) -- The dollar fell against the yen as the U.S. unemployment rate increased to 10.2 percent, reinforcing speculation the Federal Reserve will keep borrowing costs near zero into next year.

“Near-term, it adds to the uncertainty of the recovery, but it also reinforces how much longer we are going to need lower rates,” said David Tien, a money manager at Fischer Francis Trees & Watts in New York, with $19 billion in assets. “It solidifies the outlook for plentiful liquidity going into the middle of next year.”

Canada’s dollar dropped the most this month against the greenback as the nation’s employers unexpectedly eliminated jobs in October. Mexico’s peso and Norway’s krone fell against the yen on speculation the U.S. payrolls report will encourage traders to cut holdings of higher-yielding assets.

The dollar decreased 0.9 percent to 89.93 yen at 3:28 p.m. in New York, from 90.71 yesterday. The euro fell 1.1 percent to 133.44 yen, from 134.92. The dollar traded at $1.4838 per euro, compared with $1.4871.

The U.S. currency initially advanced as much as 0.4 percent versus the euro on reduced demand for riskier assets after the Labor Department reported that the unemployment rate exceeded 10 percent for the first time since 1983. The greenback erased its gain about an hour later on speculation the Fed will trail other central banks in raising borrowing costs.

Employers eliminated 190,000 jobs in October after a reduction of 219,000 in the previous month, the Labor Department reported. The median estimate of 84 economists in a Bloomberg survey was for a reduction of 175,000.

‘Risk On’

“The currency market will not pay attention to the data for an extended period,” said Steven Englander, chief U.S. currency strategist at Barclays Capital in New York. “The tone tends to remain risk on.”

The dollar was headed for a 1 percent weekly decline versus the euro after the Fed repeated at the end of a two-day policy meeting on Nov. 4 its intent to keep interest rates “exceptionally low” for “an extended period.” The central bank held the target rate for overnight lending at a range of zero to 0.25 percent.

Traders reduced bets that the Fed will increase borrowing costs in the first half of next year. Fed funds futures showed a 52 percent chance that policy makers would raise their benchmark by at least a quarter-percentage point by the June meeting. A week ago the likelihood was 63 percent.

ECB’s Stance

European Central Bank President Jean-Claude Trichet took a step yesterday toward removing emergency stimulus measures designed to end the recession, saying commercial banks won’t be offered unlimited 12-month loans next year. Policy makers kept the main refinancing rate at a record low 1 percent.

The dollar will decline to $1.50 versus the euro by year- end and remain there through the end of March, according to the median forecast of 48 economists in a Bloomberg survey.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, was little changed at 75.811 today. The gauge fell 0.2 percent on Oct. 2, when the Labor Department reported that U.S. employers eliminated more jobs in September than economists forecast.

The index slid about 15 percent from a three-year high reached in March, dropping on speculation the Fed will be slow in raising borrowing costs. The index decreased to a 14-month low of 74.94 on Oct. 21.

Outlook for Dollar

The dollar will resume its decline against counterparts as today’s payrolls report “confirms low rates in the U.S. until at least the second half of 2010,” said Achim Walde, head of currency management in Cologne, Germany, at Oppenheim KAG, where he helps oversee 3 billion euros ($4.3 billion).

The Canadian dollar weakened as much as 1.2 percent, the biggest decline since Oct. 30, before trading at C$1.0763 per U.S. dollar, compared with C$1.0651.

Employment fell by 43,200 last month, and the jobless rate rose to 8.6 percent, Statistics Canada said today in Ottawa. The median forecast of 22 economists in a Bloomberg survey was for a gain of 10,000 jobs.

The Mexican peso slid 1.9 percent to 6.70 yen and the krone fell 1.3 percent to 15.78 yen on speculation investors will reduce carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher. Japan’s benchmark lending rate of 0.1 percent makes the yen a favored target for investors seeking to fund such trades.

Australia’s dollar rose for a third day against its U.S. counterpart as the Reserve Bank said the nation’s economy will expand at more than three times the pace forecast in August and signaled it will continue to lead the world in raising interest rates. The Aussie gained 0.7 percent to 91.62 U.S. cents.

Group of 20 finance chiefs will likely urge Asian nations to allow their currencies to appreciate when they meet this weekend in Scotland, according to UBS AG.

While exchange rates won’t be on the agenda, “many nations will seek to bring it up,” Geoffrey Yu, currency strategist in London at UBS, wrote in a research report to clients.