BLBG: Dollar Declines to 13-Year Low Against Yen After Fed Rate Cut
By Stanley White
Dec. 17 (Bloomberg) -- The dollar fell to a 13-year low against the yen and the weakest versus the euro in 11 weeks after the Federal Reserve cut its target interest rate to the lowest among the world’s industrialized nations.
The U.S. currency also declined after the central bank said it will expand purchases of debt securities to fight the recession. The yen remained higher after Japan’s finance minister said he is ready to take steps in the currency market. The British pound was near the weakest on record against the euro before the Bank of England releases minutes from its Dec. 4 meeting, when policy makers cut borrowing costs to the lowest level since 1951.
The dollar fell to 88.24 yen, the lowest since August 1995, before trading at 88.67 yen as of 7:48 a.m. in London from 89.05 yen late yesterday in New York. Against the euro, the dollar declined to $1.4051 from $1.4002 yesterday, after touching $1.4192, the weakest level since Sept. 30. The euro was at 124.57 yen from 124.71 yen.
“Last week we sold the dollar against the euro and the Australian dollar, and we may add to these positions,” said Akira Takei, general manager for international bonds who helps oversee the equivalent of $2.46 billion at Mizuho Asset Management in Tokyo. “The Fed’s alternatives are diminishing. Among investors, there will be less confidence in the dollar.”
The dollar may fall to $1.45 per euro by March 31, he said.
The Australian dollar rose to a two-month high of 70.25 U.S. cents before trading at 69.65 cents from 69.43 cents yesterday. The pound traded at 90.03 pence per euro from 89.94 pence yesterday, when it reached an all-time low of 90.50 pence. Sterling rose to $1.5610 from $1.5581.
Below BOJ Rate
The Fed lowered its target rate to a range from zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The U.S. central bank reiterated plans to buy agency debt and mortgage-backed securities and said it will study buying Treasuries, a policy known as quantitative easing.
The Fed’s debt purchases will cause the dollar to weaken to $1.4860 per euro, strategists led by Robert Sinche, New York- based head of global currency strategy at Bank of America, wrote in a research note yesterday. The Fed has reduced the scarcity of dollars and investors have slowed the deleveraging process, which drove the greenback to a 2 1/2-year high against the euro in October, Sinche said.
“Those temporary supports for the dollar appear to have eroded,” Sinche wrote. “Aggressive quantitative easing by the Fed should add to U.S. dollar supply globally and undermine the value of the dollar.”
‘Secondary Concern’
The fed funds target has fallen below the BOJ’s rate for the first time since 1993. Japanese policy makers struggled in the 1990s to revive growth as the combination of deflation and recessions stranded the nation in the so-called Lost Decade.
“The Fed is saying providing liquidity is more important and that the dollar is a secondary concern,” said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. “As long as the dollar declines gradually, it’s not a problem for yields and inflation. The Fed can concentrate on providing liquidity.”
The dollar may decline to 85 yen by June, he said.
Japan’s Finance Minister Shoichi Nakagawa said the government is ready to take steps in the currency market to help the economy, Dow Jones Newswires reported. Nakagawa earlier told reporters he isn’t considering intervention now. Central banks intervene when they buy or sell currencies to influence exchange rates. Japanese stocks pared gains as a stronger yen may erode exporters’ earnings.
Honda Motor
The Japanese government needs to take action on the yen ‘swiftly,’ Honda Motor Co. President Takeo Fukui said at a press conference today. The country’s second-largest automaker today cut its operating profit forecast for a third time for the year ending March 31 to 180 billion yen ($2.03 billion) from a prior estimate of 550 billion yen as yen gains push up prices for overseas customers and the global recession crimps demand.
The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 0.7 percent to 80.085.
“The impact on the dollar is negative,” said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, a unit of Britain’s second-biggest lender. “In a financial crisis a central bank should buy whatever it deems fit. The Fed hasn’t set any target to its quantitative easing. One risk is this will damage the central bank’s balance sheet.”
The U.S. currency may decline to 85 yen in the next six months, he said.
Treasury Yields
Yields on two-, five-, 10- and 30-year U.S. government debt yesterday touched the lowest levels since the Treasury began regular sales of the securities.
The dollar has fallen 12 percent from a 2 1/2-year high of $1.2330 per euro on Oct. 28 on reduced demand for short-term funding in the greenback.
The cost of borrowing in dollars for three months in London fell yesterday on speculation policy makers will keep pumping cash into money markets to spur bank lending. The London interbank offered rate, or Libor, that banks say they charge each other for such loans dropped 0.02 percentage point to 1.85 percent, the lowest level since September 2004, British Bankers’ Association data showed.
The pound fell against the euro on speculation minutes from the U.K. central bank’s meeting earlier this month will show policy makers voted unanimously to lower borrowing costs to 2 percent to combat a recession. The BOE will release the minutes at 9:30 a.m. in London.
‘Pound Heavy’
“Negative comments from the BOE minutes are likely to keep the pound heavy for now,” Brian Kim, a Stamford, Connecticut based currency strategist at UBS AG wrote in a research note yesterday. “A unanimous decision will not be a surprise, given increased downside risks to U.K. economic growth and deflationary concerns.”
The U.S. currency has fallen 21 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the U.S. economy into a recession.
The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, propped up the dollar in 1995, when it declined to a post-World War II low of 79.75 yen.
The last time policy makers intervened, Japan sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen rose as high as 103.42 per dollar. Japan hasn’t bought yen since 1998, when it spent 3.05 trillion yen as the currency reached as low as 147.66.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net.
