The
dollar declined to a two-week low against the euro and the yen after
the Federal Reserve gave no indication it will start reversing the most
aggressive series of cuts in two decades.
The greenback
dropped for a second week as the Dow Jones Industrial Average headed
for the worst June since the Great Depression and crude oil surged to a
record. The European Central Bank is expected to raise interest rates
by a quarter- percentage point on July 3, the same day a government
report is forecast to show the U.S. lost jobs in June for a sixth month.
``It's
a combination of less hawkishness than expected from the Fed and a
fairly sharp breakdown in equities,'' said Richard Franulovich, a
senior currency strategist at Westpac Banking Corp in New York.
``That's a pretty toxic mix for the dollar.''
The dollar
fell 1.2 percent to $1.5794 per euro, from $1.5606 on June 20, after
reaching $1.5791 yesterday, the weakest since June 9. It dropped 1.1
percent to 106.15 yen, from 107.33, touching 105.87 yesterday, also the
lowest since June 9. The euro was little changed at 167.62 yen after
touching the all-time high of 169.46.
Futures on the
Chicago Board of Trade show a 24 percent chance that the Fed will
increase the target rate for overnight lending between banks by a
quarter-percentage point at its next meeting on Aug. 5, compared with
40 percent odds a week ago. The central bank held the benchmark rate at
2 percent on June 25, saying in its statement that ``uncertainty''
about the inflation outlook remains high.
The central
bank cut borrowing costs seven times beginning in September from 5.25
percent to prevent the housing slump and credit market losses from
dragging the world's largest economy into a recession.
The
dollar advanced to a one-month high against the euro on June 13, four
days after Fed Chairman Ben S. Bernanke said the risk of a
``substantial downturn'' had diminished and accelerating inflation
``would be destabilizing for growth.''
The Canadian
dollar appreciated to a three-week high against the U.S. dollar this
week as crude oil rose above $142 per barrel. The loonie, named after
the bird on the one-dollar coin, increased 0.6 percent to C$1.0105 per
U.S. dollar and touched C$1.0049 yesterday, the highest since June 3.
Norway's krone rose 1.7 percent to 5.0645 per dollar, reaching 5.0421 yesterday, the strongest since June 9.
Commodities such as crude oil and gold account for 54 percent of Canada's exports. Oil is Norway's biggest export.
The
ECB is poised next week to raise its 4 percent main refinancing rate
for the first time since June 2007, according to the median forecast of
57 analysts surveyed by Bloomberg News. The Labor Department will
probably report that U.S. non- farm payrolls fell by 60,000 in June,
according to the median forecast of 64 analysts in a separate survey.
The
euro pared its weekly gain as ECB council member Miguel Angel Fernandez
Ordonez, who is also governor of the Bank of Spain, told reporters in
Rome yesterday that an interest-rate increase by the ECB ``is not
certain, but possible.'' ECB President Jean-Claude Trichet said on June
9 that rates my rise by a ``small amount.''
``The market
is positioned for a series of rate increases, and the ECB is trying to
talk down expectations,'' said Ian Stannard, a senior currency
strategist in London at BNP Paribas SA, the largest French bank. ``The
euro will come under pressure as rate expectations are adjusted.'' The
euro may fall to $1.5285 in two weeks, Stannard said.
Investors
reduced wagers on additional rate increases by the ECB this year,
futures contracts showed. The implied yield on the December Euribor
futures contract dropped 14 basis points this week to 5.16 percent.
An
index measuring confidence in the euro area fell to 94.9, the lowest
since May 2005, from 97.6 the previous month, the European Commission
said in Brussels yesterday.
The yen gained 0.9 percent
to 10.28 against Mexico's peso and 0.8 percent to 66.27 versus the
Brazilian real this week as the Dow dropped 4.1 percent and the
Standard & Poor's 500 Index fell 3 percent. The Dow has declined 10
percent this month for the worst June since 1930.
Investors
bought the yen to pay back loans in the currency used to fund
investments in higher-yielding assets, which become less profitable
when stocks fall.
``There's very little appetite to go
against market trends,'' said Jens Nordvig, a strategist at Goldman
Sachs Group Inc. in New York. ``The overall risk appetite is very low.''
The
Bank of Japan will keep its target lending rate at 0.5 percent through
September 2009, a Bloomberg News survey of economists shows. Brazil's
benchmark rate is 12.25 percent, while Mexico's is 7.75 percent.
Implied
volatility on one-month dollar-yen options reached 11.48 percent, the
highest since June 16. Bigger currency swings can wipe out the profits
of the carry trade, in which investors borrow in countries with low
interest rates and buy assets where returns are higher.