By Ye Xie and Bo Nielsen Dec. 11 (Bloomberg) -- The dollar fell to a six-week low against the euro and yen as the cost of borrowing in the U.S. currency tumbled, indicating less demand for year-end funding. The greenback also dropped as the U.S. trade deficit unexpectedly widened and European Central Bank Executive Board member Juergen Stark signaled policy makers are reluctant to keep cutting interest rates aggressively. The Swiss franc slid against the euro and yen after the central bank reduced its main interest rate to a four-year low of 0.5 percent. “The decline in absolute panic since October has pushed investors to unwind some dollar longs,” said Robert Blake, a senior currency strategist in Boston at State Street Global Markets LLC, which has $15.3 trillion in assets under custody. “We could see a trend lower for the dollar for three months.” The firm recommended yesterday that investors erase bets that the dollar will appreciate. The dollar fell 1.5 percent to $1.3225 per euro at 11:07 a.m. in New York, from $1.3023 yesterday. It touched $1.3278, the weakest since Oct. 30. The U.S. currency dropped 1.1 percent to 91.72 yen from 92.76 and touched 91.17, the lowest since Oct. 24. The euro rose 0.5 percent to 121.33 yen from 120.78. Russia devalued the ruble for the fifth time in a month, widening its trading band against the dollar and euro after depleting reserves in defense of the exchange rate. Bank Rossii extended the amount the ruble can decline against a target exchange rate to 7.7 percent, from 6.7 percent yesterday and 3.7 percent a month ago. The ruble dropped 1.6 percent to 36.84 per euro and traded at 27.78 versus the dollar. Drop in Libor The cost of borrowing in dollars for three months in London fell to the lowest level in more than four years. The London interbank offered rate, or Libor, that banks say they charge each other for such loans slid 0.1 percentage point to 2 percent, the lowest level since September 2004, British Bankers’ Association data showed. “There’s a case for avoiding the dollar,” said Adrian Schmidt, a London-based senior foreign-exchange strategist at the Royal Bank of Scotland Plc, the fourth-biggest currency trader. “For the moment, the dollar’s on the back foot.” The Brazilian real was the biggest gainer versus the dollar among the 16 major currencies tracked by Bloomberg after the central bank held the target lending rate yesterday at a two- year high of 13.75 percent. The real gained 3.5 percent to 2.3631 versus the dollar. Falling Franc The franc fell 0.9 percent to 1.5754 per euro and 0.4 percent to 77.09 yen as the Swiss National Bank reduced the three-month Libor target by a half-percentage point to 0.5 percent. The economy is facing a recession that may be the worst since 1982. The ECB reduced the main refinancing rate last week by 0.75 percentage point to 2.5 percent, the most in its history. More cuts may be “small” as the room to lower rates is “very limited,” Stark said today in a speech in Tuebingen, Germany. The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the franc and Sweden’s krona, fell 1.2 percent at 84.449. The gauge dropped below the 55-day moving average as traders took advantage of low liquidity to test how far the index may fall, said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi Ltd. in London. The dollar may fall to $1.3450 per euro this year, he said. Trade Deficit The U.S. trade deficit expanded 1.1 percent to $57.2 billion in October from a revised $56.6 billion in September, the Commerce Department said today in Washington. The gap was projected to narrow to $53.5 billion from an initially reported $56.5 billion in September, according to the median forecast in a Bloomberg News survey of 70 economists. “If we correct credit excess without correcting the trade balance, then we need a weaker dollar to facilitate that process of correcting the global imbalance,” said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. “The trade deficit has been a dead weight on the dollar for 25 years.” The dollar has gained 11 percent against the euro in 2008 as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to seek funding in the greenback. The yen gained versus all 178 currencies tracked by Bloomberg this year as the global recession and plunging equities encouraged Japanese investors to repatriate funds. Japan’s currency jumped 21 percent versus the dollar, 34 percent against the euro and 66 percent against Brazil’s real. South Korea’s won rose as much as 3.2 percent to 1,331 per dollar, the strongest level in a month. The Bank of Korea lowered its benchmark rate less than forecast to 3 percent. The won declined 31 percent against the dollar this year, the worst performance among Asian currencies. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

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