Dollar Continues to Lose Ground on Fed Rate-Cut Bets (Bloomberg) (15-01-2008)

Jan. 15 (Bloomberg) -- The continued to decline for a fourth day against the yen and flirted with a record low versus the euro as it is speculated that U.S. retail sales stalled during the holiday season and that the Fed may cut rates at the end of the month.

The U.S. currency declined to 107.56 yen at 7:54 a.m. in London compared with 108.16 late yesterday in New York. The U.S. currency traded at $1.4871 against the euro from $1.4869. It’s all-time low of $1.4967 was reached on Nov. 23, 2007.

The yen rose versus all 16 major currencies, gaining 0.6 percent to 160.04 per euro and 0.3 percent to 96.94 per Australian dollar. The most volatile exchange rates this decade are forcing traders to buy yen to repay loans denominated in the currency used to purchase higher-yielding currencies.

The dollar also fell before this week's earnings from Citigroup Inc. and Merrill Lynch & Co., which will highlight losses on subprime mortgages. The Swiss franc rose to 1.0907 per dollar from 1.0930. The British pound traded at $1.9560.

U.S. retail sales were probably unchanged last month, after rising 1.2 percent in November, according to the median forecast in a Bloomberg survey before the Commerce Department releases the data at 8:30 a.m. in Washington. The Fed has cut interest rates 1 percentage point to 4.25 percent since September while the European Central Bank has increased rates eight times to 4 percent since November 2005.

Fed funds futures contracts on the Chicago Board of Trade show 100 percent odds the Fed will cut its target rate for overnight bank loans to at least 3.75 percent at its Jan. 30 meeting. The odds of a decrease to 3.5 percent are 50 percent, compared with zero probability a week ago.

Gains in the euro may be curbed by speculation a German report today will show investor confidence dropped to the lowest in 15 years in January, undermining the European Central Bank's case for higher borrowing costs. The ZEW Center for European Economic Research may say at 11 a.m. in Mannheim that its index fell to minus 40, according to a Bloomberg News survey.

Europe's single currency may extend this year's 1.5 percent loss against the yen after the yield premium investors earn on 10-year German bunds over similar-maturity Japanese bonds dropped to 2.62 percentage points, the lowest in almost a week.

``The ZEW report may suggest that the ECB might not be able to raise interest rates,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. The euro may drop to 160.10 yen today, he forecast.

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