BLBG: Dollar Heads for Biggest Annual Drop Against Yen in Two Decades
The dollar was set to complete its biggest annual decline against the yen in more than two decades on signs the U.S. economy is sinking deeper into recession.
The euro was poised for its best year against the British pound since its 1999 debut on speculation the Bank of England will keep its main lending rate lower than that of the European Central Bank. The Australian and New Zealand dollars were headed for record slides versus the U.S. currency and the yen as a global economic slump dragged down prices of commodities the nations export and curbed demand for higher-yielding assets.
“The dollar is likely to weaken further into 2009,” said Norifumi Yoshida, vice president of the trading section in Singapore at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest bank by assets. “The U.S. recession will probably be prolonged as the data aren’t signaling any recovery at all.”
The dollar traded at 90.33 yen as of 1:35 p.m. in Tokyo from 90.34 yen in New York yesterday. It has fallen 19 percent this year, the most since 1987. The currency was at $1.4089 per euro, gaining 3.6 percent in 2008.
The U.S. currency may decline to 80 yen and $1.48 per euro by the end of 2009, Yoshida said. His forecast compares with median estimates of 100 yen and $1.26 per euro in a Bloomberg News survey of analysts. Currency movements this week may be exaggerated because of the New Year’s holidays in Japan from today through Jan. 2, he said.
The euro traded at 97.59 British pence from 97.57 pence yesterday, when it reached a record 98.03 pence. It slid to 127.27 yen from 126.97 yen.
The yen was the best performer of 2008 among the world’s 16 most-active currencies, while South Korea’s won was the worst, sliding 29 percent.
Near-Zero Rates
The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six trading partners, fell this month after the Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to revive the economy. Consumer confidence is the lowest in at least 41 years and a slide in property prices gathered pace in October, according to U.S. reports published yesterday.
“The U.S. reducing rates to near zero is having an impact,” said Gerrard Katz, head of foreign-exchange trading in Hong Kong at Standard Chartered Plc, a U.K. bank that gets most of its profit from Asia, in an interview with Bloomberg Television. “In the second half of 2009, we should see the dollar weaken.”
Bailouts
The U.S. government this year enacted a $700 billion Troubled Asset Relief Program and used half of those funds to help banks. The Treasury this week committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.
The Institute for Supply Management’s December factory index probably dropped to 35.4, the lowest reading in almost three decades, according to a Bloomberg News survey of economists. The report is due on Jan. 2.
The Standard & Poor’s 500 Index plunged 39 percent in 2008 as the economy deteriorated, poised for its worst year since 1931. U.S. Treasuries returned 14.9 percent, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The Dollar Index is set for a 5.4 percent advance.
“The data is still going to look quite poor,” said Besa Deda, chief economist at St. George Bank Ltd. in Sydney. “It’s negative for the dollar.”
Weaker Pound
The euro surged 33 percent against the pound in 2008, heading for its best year since the currency’s 1999 introduction, after the Bank of England reduced its benchmark interest rate by 3.5 percentage points this year to 2 percent to limit the fallout from the global financial crisis.
The ECB cut its benchmark to 2.5 percent, 1.5 percentage points lower than at the start of 2008, with some policy makers indicating they may be reluctant to lower borrowing costs again next month.
The Australian and New Zealand dollars fell against the greenback today, capping the biggest annual declines since they started trading freely in 1983 and 1985, respectively.
The currencies in 2008 reached their highest levels against the U.S. dollar in more than 20 years before sliding in tandem with commodities, which account for more than half the countries’ exports. Oil prices fell yesterday, contributing to the steepest annual drop in raw-materials costs in more than half a century, after the U.S. consumer confidence report.
Cheaper Commodities
“Commodity prices are off a bit after the weak consumer sentiment data in the U.S. refocused the market on the global slump,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.
Australia’s dollar was little changed at 69.15 U.S. cents and has slid 21 percent this year. New Zealand’s dollar traded at 57.79 cents and has tumbled 25 percent in 2008.
The Australian and New Zealand dollars have slid 36 percent and 39 percent, respectively, against the yen this year as a global economic slump and $1 trillion in credit-market losses prompted investors to cut so-called carry trades.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
Australia’s benchmark rate is 4.25 percent and New Zealand’s rate is 5 percent, compared with 0.1 percent in Japan.
