BLBG: Dollar Falls Most Against Euro Since 1999 Debut After Fed Cut
By Jamie McGee and Michael J. Moore
Dec. 17 (Bloomberg) -- The dollar declined the most against the euro since the 15-nation currency’s 1999 debut and sank to a 13-year low versus the yen after the Federal Reserve cut its target lending rate to as low as zero.
The pound fell to a record against the euro after a government report showed U.K. unemployment rose last month at the fastest pace since 1991. The yen remained higher even as Dow Jones Newswires reported that Japan’s finance minister said he’s ready to take steps in the currency market.
“This move is historic,” said Russell LaScala, New York- based head of North American foreign exchange at Deutsche Bank AG, the world’s biggest currency trader. “It’s just going to keep going until the last bit of pain stops. I would not be shocked to see $1.50.”
The dollar fell as much as 3 percent to $1.4437 per euro from $1.4002 yesterday, before trading at $1.4294 at 10:49 a.m. in New York. It was the biggest intraday drop since the euro’s inception. The U.S. currency decreased 1.4 percent to 87.82 yen from 89.05 yesterday and reached 87.14, the lowest since July 1995. The euro increased 0.7 percent to 125.51 yen from 124.71.
Ecuador’s default on $3.9 billion of international bonds means it’s only a matter of time before the country drops the U.S. dollar as its currency, according to Goldman Sachs Group Inc. The use of the dollar gives President Rafael Correa no outlet for providing credit to the economy as access to foreign financing dries up, said Alberto Ramos, a Latin America economist at Goldman in New York, in an interview. Ecuador adopted the dollar in 2000 to help curb inflation.
Weaker Pound
The pound fell to an all-time low against the euro for an eighth day after the Office for National Statistics said the number of people receiving jobless benefits rose by 75,700 to 1.07 million. Bank of England policy makers voted 9-0 to cut the nation’s benchmark on Dec. 4 to 2 percent, minutes showed. Sterling weakened as much as 2.3 percent to 92.07 pence per euro. The pound fell 1.1 percent to $1.5402.
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 2.2 percent to 78.944. The dollar has fallen 14 percent from a 2 1/2-year high of $1.2330 per euro reached Oct. 28.
The Fed lowered its target rate yesterday to a range of zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The 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.
‘Uncharted Waters’
“The market is focused on exceptionally low rates in the U.S. and the move by the Fed into uncharted waters,” said Stephen Malyon, co-head of currency strategy at Scotia Capital Inc. in Toronto. “Between now and year-end, we are likely to see this current weakening trend in the U.S. dollar continue.”
The target lending rate was cut to 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 Lost Decade.
Japan’s Finance Minister Shoichi Nakagawa said the government is ready to take steps in the currency market to help the economy, Dow Jones reported. Nakagawa earlier told reporters he isn’t considering intervention now.
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 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 the currency’s gains pushed up prices for overseas customers.
Intervention in 1995
Central banks intervene when they buy or sell currencies to influence exchange rates. 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 cost of borrowing in dollars for three months in London fell today after the Fed’s rate cut. The London interbank offered rate, or Libor, that banks say they charge each other for such loans dropped 0.27 percentage point to 1.58 percent, the lowest level since July 2004, British Bankers’ Association data showed.
The U.S. currency depreciated 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.
To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
