Dollar Declines to 5-Month Low Against Euro on Cooling Economy

By Daniel Kruger and Min Zeng


Nov. 22 (Bloomberg) -- The dollar fell to a five-month low versus the euro and tumbled against the yen as a report showing an increase in jobless claims suggested the economy is cooling.

Dollar losses accelerated as a government report showed more workers filing for unemployment benefits during the past week. The yen gained against 14 of the world's 16 major currencies as investors bought back low-yielding currencies used to fund investments elsewhere, a practice known as the carry trade.

``There is a general pessimism on the dollar right now,'' said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Mellon Financial Corp. ``People are now concerned that the growth outlook heading into next year is on the down side.''

The dollar declined to $1.2938 per euro at 4 p.m. in New York, from $1.2844 yesterday. The U.S. currency reached an intraday low of $1.2957, the weakest since June 5 when it touched $1.2979. The dollar dropped to 116.74 yen, from 117.92. The euro traded at 151.05 yen, from 151.46 yesterday and a record high of 151.67 on Nov. 20.

The yen gained about 1 percent today against the dollar, the biggest increase since June 29.

The U.S. currency fell against 14 of 16 major currencies after economic advisers to President George W. Bush yesterday cut their forecasts for growth next year.

The yen extended its gains against the euro after Luxembourg Prime Minister Jean-Claude Juncker, who's also chairman of the panel of finance ministers from the euro region, said a recent decline in the yen has been ``too rough.''

Economic Growth

U.S. economic growth will slow in 2007 because of a weaker housing market, Bush's economic advisers said in their semi- annual forecast. Gross domestic product will increase 2.9 percent next year, slower than the 3.6 percent forecast in June, the Council of Economic Advisers said.

Initial jobless claims increased by 12,000 to 321,000 in the week that ended Nov. 18 from the prior week's revised 309,000, the Labor Department said today in Washington. The four-week moving average rose to 317,000 from 314,000.

The University of Michigan's index of consumer sentiment slipped to 92.1. The measure has averaged 88.1 since monthly data were first compiled in 1978. The Michigan index was expected to slip to 93.3 in November from the previous month's final reading of 93.6, according to the median estimate of 57 economists in a Bloomberg News survey.

Thanksgiving Holiday

The dollar's decline may have been aided by trading below the $1.9 trillion average leading up to tomorrow's U.S. Thanksgiving holiday.

``The dollar's losses today were a bit exaggerated,'' said Christian Dupont, a senior currency trader at Societe Generale SA in Montreal. ``The market is a lot less liquid.''

Juncker's comments and data indicating a slowing U.S. economy led traders to cancel carry trade bets.

``You're seeing an unwind of carry trades that have been a dominant feature of the market since the end of the second quarter,'' said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston.

Popular carry trades this year have included selling the yen to finance investments in the Australian dollar, euro and British pound, and selling the Swiss franc to invest in the euro and the pound, Upadhyaya said.

The yen and the franc are popular as so-called funding currencies because of the low interest rates in Japan and Switzerland.

``These are the currencies that are doing well today,'' Upadhyaya said.

The Swiss franc has outperformed 15 of the 16 major currencies today and gained about 1.2 percent versus the dollar.

Yield Advantage

The Bank of Japan's benchmark lending rate is 0.25 percent and the Swiss National Bank's benchmark rate is 1.75 percent. That compares with the European Central Bank's benchmark rate of 3.25 percent and the Bank of England's 5 percent benchmark.

Based on spot prices, the pound has gained 10.1 percent against the yen while the euro has increased 8.2 percent versus the Japanese currency so far this year.

When you factor in the higher yields in the U.K. and throughout Europe, ``a lot of these currencies look even better,'' Upadhyaya said.

The dollar is declining as the yield advantage of U.S. bonds is narrowing. Ten-year Treasury notes yield 85 basis points more than 10-year German bunds, the smallest advantage since June 2005. Ten-year Treasuries yield 2.90 percentage points more than comparable-maturity Japanese government bonds, near the lowest since December.

Investors see a 40 percent chance the Federal Reserve will lower its overnight interest rate on loans between banks at its March 21 meeting, compared with 17 percent odds on Nov. 15, according to interest-rate futures prices. Policy makers left the rate on hold for the past three months, after 17 quarter- percentage point increases to 5.25 percent.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net ; Min Zeng in New York at mzeng2@bloomberg.net .

Last Updated: November 22, 2006 16:03 EST

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