Dollar Heads for Weekly Loss on Concern U.S. Growth Has Stalled

By Kim-Mai Cutler and Stanley White

Feb. 22 (Bloomberg) -- The dollar traded near a three-week low against the euro, headed for a second weekly decline, on speculation the Federal Reserve will cut borrowing costs to stave off a recession while European policy makers keep rates on hold.

The U.S. currency fell against 14 of its 16 most-active counterparts after manufacturing in the Philadelphia area shrank the most in seven years. The Australian and New Zealand dollars climbed as gold surged and prices of oil, grains and other commodities rose to records. The Brazilian real advanced to the highest in almost nine years and Singapore's dollar reached a decade high.

``The dollar is generally coming under pressure because of the divergence we're seeing among central bank policy approaches to the current environment,'' said Ian Stannard, a London-based currency strategist at BNP Paribas SA, France's largest bank. ``The Fed has demonstrated that it's very much focused on growth concerns while the European Central Bank is likely to continue with quite hawkish comments.''

The dollar fell to $1.4828 per euro at 7:09 a.m. New York, the weakest since Feb. 5, from $1.4814 yesterday. The currency lost 1 percent against the euro since the end of last week and dropped 0.8 percent to 107.02 yen. The euro was at 158.69 yen, from 158.25 on Feb. 15, paring a weekly gain to 0.3 percent.

The euro extended its advance against the dollar after an industry report showed growth in European service industries accelerated more than forecast in February.

Singapore Dollar

Singapore's dollar advanced 0.5 percent this week to S$1.4060 per dollar, the highest since January 1997, before a government report Feb. 25 forecast to show consumer prices climbed the most in a quarter century. The Brazilian real rose to 1.7009 yesterday, the highest level since May 1999.

The Australian and New Zealand dollars headed for a second weekly gain on speculation the interest-rate advantage of the two nations over the U.S. will widen, bolstering demand for their higher-yielding assets. The Australian dollar rose 1.6 percent to 92.32 U.S. cents and the New Zealand dollar gained 2.1 percent to 80.68 U.S. cents.

Futures on the Chicago Board of Trade show odds of a half- point cut in the Fed's target rate to 2.5 percent on March 18 have risen to 92 percent, from 66 percent last week. Traders increased bets Australia's central bank will raise borrowing costs a quarter point to 7.25 percent next month. New Zealand's key rate is a record high 8.25 percent.

The dollar fell the most against the euro in four weeks after a report yesterday showed manufacturing in the Philadelphia region, seen as a proxy for other areas in the U.S., had the biggest contraction since 2001 in February.

Fed Forecasts

The Fed has lowered its main rate to 3 percent from 5.25 percent since Sept. 18 to avert the first recession since 2001. That has eroded the appeal of U.S. assets as accelerating inflation in Europe prompted investors to reduce expectations for lower ECB interest rates.

Fed officials cut their 2008 U.S. growth forecasts for a third time on Feb. 20 and said in the minutes of their last meeting rates should be held down ``for a time.'' They now expect the economy to expand by 1.3 percent to 2 percent, compared with the 1.8 percent to 2.5 percent predicted in October.

Some members noted ``when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.''

U.S. Recovery

``If you take the view that the U.S. is going to have a strong V-shaped recovery, then the euro at $1.48 starts to look pretty exposed,'' said Gerry Celaya, chief strategist at Redtower Ltd. in Aberdeen, Scotland in a television interview. ``That's the view we're taking, that the Fed will have to raise rates before 2009.''

The dollar may rebound to $1.40 against the euro by year- end, according to the median forecast of 39 analysts surveyed by Bloomberg.

Currencies from Norway and Sweden, two commodity exporters, tend to ``perform best'' when inflation expectations rise, said Deutsche Bank AG, the world's largest currency trader. The krone may rise to 7.83 and the krona may advance to 9.11 in three months, Deutsche Bank forecast.

The Norwegian krone traded at 7.8930 per euro and the Swedish krona was at 9.3062.

Ten-year Treasuries yielded 2.35 percentage points more than similar-maturity Treasury Inflation Protected Securities, the rate of consumer price increases investors expect for the next decade, compared with 2.2 percentage points a month ago.

Breakeven Rate

The so-called breakeven rate will widen for major economies, Bilal Hafeez, London-based global head of currency strategy at Deutsche Bank, wrote in a research note today. Norway's and Sweden's central banks are likely to raise interest rates, boosting their currencies, the report said.

The yen rose versus eight of the 16 most-active currencies this week including the rand and Canadian dollar as falling stock prices prompted traders to shun higher-yielding assets funded by loans in Japan, or carry trades.

Japan's currency rose 1.6 percent this week against the South African rand to 13.8287 and advanced 1 percent to 106.02 per Canadian dollar. Japan's benchmark interest rate of 0.5 percent, the lowest among developed nations, compares with 11 percent in South Africa and 4 percent in Canada.

Stocks in Europe and Asia fell. The MSCI Asia-Pacific Index dropped 0.6 percent and Europe's Dow Jones Stoxx 600 Index declined 0.5 percent.

Stocks, Correlation

The Nikkei 225 Stock Average fell 1.4 percent today following the biggest decline in a week on the Standard & Poor's 500 Index. The dollar-yen's correlation with the Nikkei 225 was 0.95 in the past year, according to data compiled by Bloomberg. A value of 1 means the two variables move in lockstep.

``The yen's fate is dependent on the stock markets,'' said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan's second- largest publicly traded lender. ``Almost every time equities sell off, people get nervous about carry trades and buy yen.''

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that currency moves erase those profits.