Dollar Falls to 12-Year Low of 100 Yen on Carlyle Fund Failure

March 13 (Bloomberg) -- The dollar fell below 100 yen earlier today for the first time since 1995 and to a record low against the euro after a Carlyle Group fund moved closer to collapse, triggering concern of more turmoil in financial markets.

The dollar approached parity with the Swiss franc and slumped against the British pound after Carlyle said lenders will take over the assets of its mortgage-bond fund and President George W. Bush acknowledged the U.S. currency's decline was not ``good tidings.'' The dollar's drop may prompt Middle East central banks to reduce dollar holdings, Greg Gibbs, a strategist at ABN Amro Holding NV in Sydney, said in a report.

``Sentiment for the dollar continues to deteriorate very, very rapidly and if we're not careful this will turn into a dollar crash,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon, the securities unit of Credit Agricole SA, France's second-biggest bank. ``The risk is that we see a fairly aggressive move sharply lower towards 95 yen, and that could really perk up the interest of the Bank of Japan.''

The dollar fell as low as 99.77 yen, the weakest since Nov. 9, 1995, before trading at 100.24 at 7:38 a.m. in New York, from 101.79 yesterday. The dollar dropped to $1.5624 per euro, the lowest since the common European currency's debut in 1999, and was at $1.5591 from $1.5551. It also slumped to a record 1.0045 Swiss francs. Japan's currency advanced to 156.27 per euro, from 158.30.

The U.S. currency fell against a basket of six major trading partners to the lowest since the index began in 1973. The Dollar Index traded on ICE Futures in New York declined to 71.94.

Yen Sales

Japan sold the yen on the four occasions since 1995 when the currency approached 100 to support exporters including Toyota, the world's second-biggest automaker. The Bank of Japan sold 14.8 trillion yen ($148 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.

The yen's 24 percent gain against the dollar from a 4 1/2- year low on June 22 was ``unexpected'' and will damage earnings, Toyota Motor Corp. President Katsuaki Watanabe said today.

``We must continue cost cuts by all means, but the currency has reached the level where we have to think about other measures,'' Watanabe told reporters in Tokyo. A gain of 1 yen against the dollar cuts Toyota's annual operating profit by 35 billion yen, according to the automaker.

The yen may rise as high as 95 per dollar, according to forecasts this month by Citigroup Inc., the third-biggest currency trader, Lehman Brothers Holdings Inc., the fourth- biggest U.S. securities firm, and Mizuho Financial Group Inc., Japan's second-largest publicly traded bank. Deutsche Bank AG and UBS AG, the world's two biggest currency traders, had predicted the dollar would hold above 100.

Intervention Risk

``There's more than a 50 percent probability that the U.S. is in recession,'' Eisuke Sakakibara, dubbed ``Mr. Yen'' when he was Japan's top currency official from 1997 to 1999, said in an interview on March 6. ``The dollar-yen rate is dependent on the state of the U.S. economy.''

The Group of Seven, which next meets April 12-13 in Washington, may signal its intent to consider coordinated intervention, UBS strategists wrote in a March 3 report. Unilateral intervention ``seems unlikely'' after Japan's economy has grown every year since 2002, it said.

The yen is a favored funding currency for carry trades, in which investors borrow in a country with low interest rates and invest in one with higher yields, earning the spread between the two. The risk is that currency moves erase those profits.

The nation's benchmark rate of 0.5 percent, the lowest among major economies, compares with 3 percent in the U.S., 4 percent in Europe, 7.25 percent in Australia and 8.25 percent in New Zealand.

Carlyle Defaults

Carlyle Capital Corp., co-founded by David Rubenstein, said in a statement it defaulted on about $16.6 billion of debt as of yesterday. Lenders will ``promptly'' take over all of its remaining assets and any remaining debt is expected ``soon'' to go into default, it said.

The yen has rallied 13 percent against the dollar as the Fed cut rates amid the worst housing slump in a quarter of a century and $190 billion of U.S. subprime-mortgage-related losses and markdowns at the world's biggest financial institutions.

``Investors are starting to lose confidence in the dollar, given the increased uncertainty over credit-related losses,'' Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note to clients today. ``Carlyle is unlikely to be the last hedge fund in difficulty. That will only further depress investor sentiment.''

Recession Concern

The biggest job losses in five years and record fuel costs are eroding U.S. consumer confidence and spending, which accounts for more than two-thirds of the economy. Lehman and JPMorgan Chase & Co. last week said the U.S. is headed into a recession.

A report today is forecast by economists to show retail sales rose 0.2 percent in February after a 0.3 percent gain in the previous month, according to a Bloomberg survey. The Commerce Department will release the data at 8:30 a.m. in Washington.

``Dollar-yen is going lower,'' said Ray Farris, head of foreign-exchange strategy at Credit Suisse in London. ``It will definitely overshoot our 98 forecast in the very near term. Our forecast was for the dollar to reach 98 in three months. The big question now is whether there will be intervention.''

Japanese officials are unlikely to intervene now in the foreign-exchange market, because the yen is ``cheap'' compared to other currencies, Sakakibara said. The U.S. and Japan may intervene to weaken the yen should it break through 90 and head toward 80 per dollar, he said.

Trading Partners

The yen's real effective exchange rate, measured against 15 currencies of major trading partners including China, Europe and Canada, is 99.5, according to Bank of Japan figures. The rate averaged 121.9 in the first quarter of 2004, when the bank last intervened on behalf of the Ministry of Finance.

Central banks intervene in the foreign-exchange market when they buy or sell currencies to influence exchange rates.

``The yen hasn't played its part in terms of dollar depreciation,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup in New York. As carry trades unwind, ``we could find ourselves moving down toward 95 very, very quickly in the next couple of weeks.''

The yen may strengthen further as global growth slows and other central banks will lower interest rates, prompting Japanese investors to send money back home, said Scott Ainsbury, who helps oversee about $12 billion in currency as a portfolio manager in New York at FX Concepts Inc.

IMF Forecast

Japan's economy, the world's second-largest, may expand 1.5 percent this year, matching the growth rate in the U.S., the International Monetary Fund said on Jan. 29. It would be the first time Japan doesn't lag behind the U.S. since 1991.

Japanese mutual funds have reduced purchases of overseas assets by 9 percent to 33.5 trillion yen in January, from 36.9 trillion yen in December, according to the Investment Trust Association data.

``Money is flowing back toward Japan, rather than going out to the rest of the world,'' said Ainsbury. ``Why put the money in the U.S. where stocks are sliding and the dollar is sliding? It's just a double whammy.''

The yen will reach 95 per dollar in three months, he predicted.