Dollar May Fall to Record Versus Euro as Credit Concern Spreads
By Bo Nielsen
http://www.bloomberg.com/apps/news?pid=20601087&sid=axpjBSgK8pgc&refer=home
A roll of pennies July 25 (Bloomberg) -- The dollar may decline to another record low against the euro as concern increases that
a worsening U.S. housing market will spur tougher lending practices and erode demand for riskier assets.
The U.S. currency may drop for a fourth day versus the yen for the first time in more than a month on an industry report today forecast by economists to show sales of existing homes fell to the lowest in four years. The yen's gains may be limited before a report on July 27 forecast to show Japan's core consumer prices probably fell for a fifth straight month.
``Continued weakness in the housing market will weigh on growth,'' said Brian Garvey, senior currency strategist in Boston at State Street Global Markets. ``Coupled with the concern about the credit market, we are recommending investors to short the dollar.'' The firm is one of the world's largest custodians of investor assets, with $12.3 trillion under management.
The dollar dropped to $1.3825 per euro at 6:12 a.m. in Tokyo after declining yesterday to record of $1.3852. It fell 0.7 percent to 120.25 yen after touching 120.04 yesterday, the weakest since May 14.
The U.S. currency fell as Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, yesterday reported a third straight quarterly earnings decline as more consumers fell behind on home equity loan payments.
The National Association of Realtors is expected to report today that existing-home sales fell last month to the lowest since April 2003. Sales probably dropped to 5.86 million in June from 5.99 million the previous month, according to the median forecast of 73 economists surveyed by Bloomberg News.
The Commerce Department tomorrow is forecast to show new home sales fell last month to 890,000, close to the lowest level in almost seven years.
Goldman Recommendation
Goldman Sachs Group Inc. yesterday recommended selling the dollar against an equally weighted basket of the yen, the South Korean won and the Singapore and Taiwan dollars on speculation subprime mortgage risk might limit broader credit issuance and Asian interest rates will rise.
``Subprime is not going away,'' said Alan Ruskin, head of international currency strategy in Greenwich, Connecticut, at RBS Greenwich Capital Markets. ``People are worried it will turn into a wider credit story.''
At least 35 bond and loan deals worldwide have been pulled, delayed or restructured in the past five weeks, according to Bloomberg data.
Fed Outlook
The Federal Reserve lowered its estimate for fourth- quarter growth to 2.25 percent to 2.5 percent from 2.5 percent to 3 percent last week.
The euro must remain above $1.3850 to extend its gain as traders sell the currency to protect so-called options barriers, according to Steven Butler, director of foreign exchange trading in Toronto at Scotia Capital Inc. A break through that level renders their bets worthless and generates losses, he said.
Homebuilders in the Standard & Poor's 500 Index retreated yesterday to the lowest since 2003, and financial shares fell to a four-month low after Countrywide's results raised concern borrowers are defaulting on less-risky mortgages. The index lost 1.98 percent, the biggest drop since March 13.
``Risk aversion is back, and I think you are going to see a period of yen strengths,'' said Tom Fitzpatrick, global head of currency strategy in New York at Citigroup Global Markets Inc. He forecasts Japan's currency to rise to 118 per dollar in the next one to two weeks.
The yen traded at 166.07 per euro after rising 1.13 percent yesterday, the biggest surge since March 28, as investors unwound so-called carry trades in which they borrow in the Japanese currency and invest overseas.
Japan's currency gains may abate before a report on July 27 forecast by economists to show Japan's consumer prices probably fell for a fifth straight month, undermining the case that inflation will take hold and the central bank will raise rates.
Japan's Inflation
Core consumer prices may have dropped 0.1 percent last month after falling the same amount in May, according to the median forecast of 44 economists surveyed by Bloomberg News.
Bank of Japan Governor Toshihiko Fukui said this month that prices will ``definitely'' resume rising in the long term and the bank should increase the key rate, the lowest among major economies, to sustain economic growth.
Japan's key overnight lending rate of 0.50 percent is the lowest among major economies. The benchmark rate is 5.25 in the U.S., 4 percent in the 13-country euro-zone and 8 percent in New Zealand.