Interest rate futures show 72% odds of lower Fed Funds rate next week - How many understand Ben?

Dollar Trades Near Record Low Against Euro as Fed May Cut Rates
By Kosuke Goto and Ron Harui

Sept. 12 (Bloomberg) -- The dollar traded near a record low against the euro as investors bet the U.S. will lose its interest-rate advantage over Europe as the housing market slumps.

The U.S. currency is heading for the longest losing streak since April after the National Association of Realtors yesterday cut its home sales forecast for the ninth time this year, raising the odds the Federal Reserve will lower its key rate next week. The yen erased gains after Kyodo News reported Japan's Prime Minister Shinzo Abe offered to resign, citing officials from the ruling Liberal Democratic Party.

``Expectations of narrowing interest-rate differentials are underpinning the euro-dollar,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``It will likely hit a record high of $1.39 today.''

The dollar traded at $1.3842 per euro at 1:31 p.m. in Tokyo from $1.3839 late in New York yesterday, within 0.2 percent of the all-time low of $1.3852 reached July 24. The dollar was at 114.31 yen from 114.27.

Abe is to meet the press at 2 p.m. local time, Kyodo said.

``Abe should have been depressed after a major defeat at national elections in late July and a series of his ministers resigning,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``The impact of this news on the dollar-yen should be limited as the market focus is now totally on subprime problems.''

The U.S. currency has declined 8.3 percent versus the euro and 10 percent against Australia's dollar during the last 12 months as the ECB and Reserve Bank of Australia raised rates to 4 percent and 6.5 percent respectively, while the Fed kept its overnight lending rate between banks at 5.25 percent.

Declining Home Sales
Against the dollar, Australia's currency rose to a one-month high of 83.49 U.S. cents from 82.68 cents late in Asia yesterday. New Zealand's dollar advanced to the strongest in about two weeks at 70.81 U.S. cents from 69.57 cents.

U.S. existing home sales will fall 8.6 percent in 2007, exceeding the 6.8 percent drop estimated a month ago. New-home sales probably will decline 24 percent on top of an 18 percent fall in 2006, according to the National Association of Realtors, which said the housing slump will extend into 2008.

The subprime-market turmoil is ``going to last,'' said Rachana Mehta, global bonds and currency strategist at DBS Asset Management Ltd. in Singapore. ``Toward the end of the year, I still expect the dollar to weaken.''

The U.S. currency may move between $1.35 and $1.40 per euro and 112 and 116 yen by year-end, Mehta said.

Contrasting Rate Outlook
Interest-rate futures show 72 percent odds the Fed will lower borrowing costs by half a percentage point to 4.75 percent next week. A month ago, traders expected a quarter-point cut.

By contrast, European Central Bank President Jean-Claude Trichet said there is a risk inflation will accelerate, stoking bets of another interest-rate increase this year from 4 percent.

Annualized euro region labor costs, an inflation indicator, are forecast to increase to 2.3 percent in the second quarter, according to a Bloomberg News survey of economists.

The euro may weaken against the yen on speculation Japanese investors are repatriating earnings from German debt holdings on concern the credit-market crisis will spread.

Germany is due to make more than 15 billion euros ($20.7 billion) in redemption and coupon payments on government bonds on Sept. 14, according to data compiled by Bloomberg.

``There seems to be some selling of euros for yen, which is related to the redemption of euro bonds at the end of this week,'' said Nobuaki Tani, a client manager of the Market Trading Office at Resona Bank Ltd. in Tokyo. ``This may weigh on the euro,'' pushing it down to 157.50 yen and $1.38 against the dollar today, he said. The euro last bought 157.96 yen.

Higher Yen Forecast
The yen also may rally on speculation the U.S. subprime- mortgage crisis will deepen, prompting investors to sell higher- yielding assets funded with Japanese loans, known as carry trades.

Japanese investors sold more foreign bonds than they bought for a third month in August, with net sales of 690.4 billion yen ($6.05 billion), data from the Ministry of Finance showed today. The yen rose 2.4 percent versus the dollar last month.

Bank of America N.A. raised its 2007 forecast for the yen to 117 against the dollar as Japanese individuals invest fewer savings overseas.
The yen has rebounded from a 4 1/2-year low in June to become the best performer among the 16 most-active currencies in the past month as falling stocks discouraged housewives, pensioners and businessmen from taking out loans to buy higher- yielding assets.
``Japanese investors' tolerance for risk is decreasing,'' Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo, said in an interview today. ``Their courage for investing overseas isn't as strong.''

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 the borrowing and lending rate. The risk is that currency moves erase those profits.