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Dollar May Extend Two-Year Decline Versus Euro on Slower Growth Bloomberg
By Bo Nielsen
Jan. 1 (Bloomberg) -- The dollar may extend a two-year decline against the euro on speculation a slowing economy will make U.S. assets less attractive to investors.
The U.S. currency fell versus 14 of the 16 most-actively traded currencies in 2007 as the Federal Reserve reduced borrowing costs three times to temper the worst housing slump since 1991. The unemployment rate probably increased last month to the highest since July 2006, according to the median forecast in a Bloomberg News survey before the government reports the data on Jan. 4.
``The U.S. economy will be pushed close to the recession level,'' said Greg Salvaggio, vice president of capital markets in Washington at currency-trading company Tempus Consulting. ``There will be further dollar weakness in early 2008.''
The dollar lost 9.5 percent against the euro in 2007, dropping to $1.4588, following a 10.2 percent drop in 2006. It increased 0.9 percent yesterday after a report from the National Association of Realtors showed purchases of existing homes unexpectedly rose in November.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the dollar versus the euro, compared with those on a gain -- so-called net shorts -- fell to 30,641 in the week to Dec. 25, from 31,149 the previous week and a record of 120,000 in May, figures from the Washington-based Commodity Futures Trading Commission show.
``One of the larger positions in the market'' in 2007 was bets the euro would rise versus the dollar, ``and that's being reduced,'' said Robert Fullem, manager of corporate foreign exchange sales in New York at Bank of Tokyo-Mitsubishi UFJ Ltd.
Payroll Report
U.S. payrolls rose by 70,000 last month after increasing 94,000 in November, according to the median forecast of economists surveyed by Bloomberg before the Labor Department's Jan. 4 report. The jobless rate probably increased to 4.8 percent from 4.7 percent in November.
The U.S. currency fell 6.3 percent for the year to 111.55 yen, dropping 0.7 percent yesterday. The euro increased 3.5 percent to 162.78 yen for its eighth straight annual increase.
Since Oct. 31, the yen has appreciated against all of the 16 most active currencies as exchange-rate volatility discouraged carry trades funded in Japan.
In the carry trade, investors borrow in countries with lower lending rates and use the cash to buy assets in nations that offer higher returns. Currency fluctuations can erase the profits.
Implied Volatility
Implied volatility on the three-month dollar-yen option, a gauge of the risk associated with currency bets, reached 10.58 percent yesterday, the highest since Dec. 5.
Japan's benchmark interest rate of 0.5 percent, the lowest in the industrialized world, compares with 11.25 percent in Brazil, 8.25 percent in New Zealand and 4 percent in the 13 nations sharing the euro.
The dollar fell 17 percent versus the Brazil real in 2007 on speculation that growth in U.S. gross domestic product will slow.
The economy will increase at a 1 percent annualized rate in the fourth quarter, down from 4.9 percent in the third quarter, according to the median forecast of 63 economists surveyed by Bloomberg News from Dec. 3 to Dec. 10.
The Fed cut its benchmark lending rate by a total of 1 percentage point to 4.25 percent in three steps in 2007 beginning in September. The European Central Bank increased its rate two times last year to 4 percent.
The chance the Fed will cut the target rate for overnight lending between banks a quarter-percentage point at its Jan. 30 meeting has risen to 92 percent from 76 percent a week ago, according to futures on the Chicago Board of Trade.
The U.S. currency will trade at $1.45 against the euro and 110 against the yen by the end of March, according to the median forecasts of 42 analysts and brokerages surveyed by Bloomberg.
Dollar stumbles into 2008
By Peter Garnham
Published: January 1 2008 22:27 | Last updated: January 1 2008 22:27
The dollar will stumble into 2008 down but not necessarily out, according to many watchers of the worlds currency markets.
Last year the dollar continued its multi-year downward trend amid a toxic mix of negative cyclical and structural factors.
These included deterioration in relative growth and interest rate differentials between the US and the rest of the world as well as increased concerns over the health of the US financial system, which was in the eye of the storm as the credit crisis worsened and the US housing market faced collapse.
Diversification of central banks foreign exchange reserves away from the dollar and the potential exit from dollar pegs by Middle Eastern monetary authorities also took their toll.
Analysts say that, on top of all this, US officials in effect welcomed the fall as a means of supporting the economy, giving investors the impression that selling the dollar was a one-way bet.
Mitul Kotecha, at Calyon, believes that a number of the risks to the dollar have been overplayed and, in any case, may already be in the price. Looking ahead, he says, much will depend on the path of the US economy.
Should the weakness in the US economy turn into a full-blown recession, the likelihood of a rout in the dollar will increase substantially, analysts say.
Many analysts believe the Federal Reserves move to cut interest rates, combined with the past decline in the dollar and its boost to exports, will help the US economy avoid a recession.
We believe that the rest of the world will not easily decouple from the slowing in the US economy and that, as growth expectations are revised lower outside of the US, the relative growth differential will move back in favour of the dollar, says Mr Kotecha.
Analysts say that while there is broad consensus that the US economy will slow in 2008, there is less agreement on the effect on the rest of the world.
Hans Redeker, at BNP Paribas, says the idea that the US economy has decoupled from the rest of the world has been the main driver of the dollars recent decline. But as 2008 unfolds, markets will conclude that decoupling will be less distinct than previously thought, boosting the dollar.
After years of being dollar bears, we see it coming into demand, says Mr Redeker. The dollars decline, especially from February to November, has been built on the decoupling idea. As it does not materialise, the dollar will catch up.
US households have about $300bn invested in non-dollar denominated securities. When global growth disappoints, these funds will be repatriated into dollars, Mr Redeker says.
He notes increasing signs that Asian countries that manage their exchange rates, especially China, will allow their currencies to appreciate in the face of mounting inflationary pressures.
Once Asian currencies move higher against the dollar, other free-floating currencies will see less demand from Asia, triggering their decline not only against Asian currencies but also against the dollar.
David Woo, at Barclays Capital, expects the euro to be rangebound between $1.40 and $1.50 against the dollar in 2008. He says investors can profit from the fact that some countries, notably the UK and Canada, will be more affected by a US slowdown than others.
We view the underperformance of the pound and the Canadian dollar as consistent with the fact that the business cycles of the UK economy and the Canadian economy have been historically more correlated with the US, he says.
On the yen, analysts expect it to benefit from a slowdown in global growth in 2008. It has underperformed during the recent period of global expansion.
Derek Halpenny, at Bank of Tokyo-Mitsub