Dollar Declines to 11-Month Low Versus Euro as Rate Gap Narrows
By: Administrative Account | Source: Bloomberg
April 29, 2006 6:03AM EST

April 28 (Bloomberg) -- The dollar reached the weakest since May 2005 versus the euro and approached its lowest this year against the yen on anticipation interest rates will rise faster in Europe and Japan than the U.S. The dollar has slumped as Federal Reserve policy makers including Chairman Ben S. Bernanke signaled a pause in their 22- month cycle of rate increases. The currency also fell to a 28- year low against Canada's dollar. ``People have been looking for a reason to sell the dollar all year,'' said Michael Cairns, trading manager at FX Solutions LLC, a currency brokerage in Ridgewood, New Jersey. ``Now you have the Fed chairman reinforcing the view that we have one more hike to go and inflation is not a problem.'' The dollar fell to $1.2634 per euro at 5:02 p.m. in New York from $1.2534 yesterday. It touched the weakest since May 20 and lost 4.1 percent this month. The U.S. currency dropped to 113.83 yen, for a 3.4 percent drop in April, the most since October 2004. It sank to a three-month low. The dollar dropped this month versus 15 of the 16 most actively traded currencies tracked by Bloomberg. It fell to C$1.1164, the lowest against Canada's dollar since 1978. The U.S. currency's drop this month against the euro was its worst since December 2003, when it touched a then-record low of $1.26 per euro and traders speculated the Bush administration wasn't concerned about the decline. The dollar's record low is $1.3666 per euro in December 2004. The dollar extended its losses after the University of Michigan said its index of consumer sentiment decreased to 87.4 from 88.9 in March. A separate report showed Chicago-area manufacturing slowed this month. `Sell Dollars' The U.S. economy expanded in the first quarter at an annual pace of 4.8 percent, the fastest in more than two years. The rise in gross domestic product, the value of all goods and services produced in the U.S., followed a 1.7 percent rate of increase the prior three months, the government said today in Washington. ``There is a lot of interest to sell dollars,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. ``The economy is peaking out now.'' The dollar slid a sixth straight day versus the euro, the longest slump since a six-day tumble in July. Tom Fitzpatrick, chief technical analyst at Citigroup Inc. in New York, trimmed his short-U.S. dollar trades today, citing the potential for a temporary dollar rebound. A short trade is a bet a currency will decline. ``We remain bearish'' on the dollar, he said in a research note. ECB Expectations Bernanke said the Fed may stop raising rates ``at some point.'' The Fed increased its key rate to a five-year high of 4.75 percent last month, and futures traders still anticipate a rise to 5 percent at the next rate-setting meeting in May. The European Central Bank has lifted rates twice since December to 2.5 percent and interest-rate futures suggest traders expect three more increases this year. The Bank of Japan has kept its main interest rate near zero percent since 2001 to combat deflation, and may raise the target by September, according to a Bloomberg survey. The extra yield on two-year U.S. bonds compared with German and Japanese two-year debt is 149 basis points and 419 basis points, respectively. Those yield differentials are 10 basis points and 7 basis points narrower this week, respectively. A basis point is 0.01 percentage point. China yesterday unexpectedly lifted its key interest rate for the first time since October 2004 to prevent the economy from overheating. A strong yuan may boost Chinese imports of products from Japan, the nation's largest trading partner, boosting the yen. The yuan has gained 1.2 percent since a revaluation in July. Weekly Loss The dollar had its worst week against the yen since mid- March after the G-7 called for faster currency appreciation in Asia and as a Japanese government report showed faster growth. The U.S. currency dropped 2.4 percent this week against the yen after G-7 finance ministers and central bankers on April 21 said it's ``critical'' for Asian countries, especially China, to allow currency gains to ease a reliance on exports to fuel growth. The Bank of Japan said today consumer prices will rise for the next two years, boosting the case for the first increase in borrowing costs for five years. Japan's consumer prices have risen for five straight months. ``Sentiment is shifting toward yen-bullishness,'' said Akifumi Uchida, a deputy general manager of financial markets at Sumitomo Trust & Banking Co. Ltd. in Tokyo. Japan will stand ready to buy or sell the yen to curb ``excessive'' fluctuations, according to a Ministry of Finance official in Tokyo. ``Speed matters,'' the official, who asked not to be identified, said in an interview today. ``Excessive fluctuations in exchange rates are a problem.'' Japan's Chief Cabinet Secretary Shinzo Abe and Heizo Takenaka, the minister of internal affairs, said today that deflation persists in Japan.

To contact the reporter on this story: Joshua Krongold in New York at jkrongold2@bloomberg.net; Michael McDonald in New York at mmcdonald10@bloomberg.net. Last Updated: April 28, 2006 17:06 EDT