Bloomberg: Dollar Falls on Reduced Concern Housing Will Slow Global Growth by Bo Nielsen

Dollar Falls on Reduced Concern Housing Will Slow Global Growth
By Bo Nielsen

Aug. 25 (Bloomberg) -- The dollar fell the most against the euro since March on diminished concern that U.S. housing weakness will slow global growth.

The yen posted its biggest weekly decline versus the euro since 2003 as investors returned to carry trades in which they borrow in Japan to invest in higher-yielding assets elsewhere. Global stocks rose and volatility fell as traders increased bets the Federal Reserve will cut rates in September.

``Things are calming down sufficiently enough for the market to go back to the trades that dominated prior to the shake-out: buying other currencies against the yen and selling the dollar,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, with about $250 million in funds under management.

The dollar dropped 1.5 percent this week to $1.3675 per euro, for the biggest weekly decline since mid-March. The dollar rose 1.8 percent to 116.44 yen. The yen plummeted 3.4 percent to 159.26 per euro, for the biggest loss since September 2003.

``People are calmer because they expect the Fed will cut rates in September,'' said Mark Meadows, a strategist at currency-trading company Tempus Consulting Inc. in Washington.

The yen advanced last week by the most against the euro since 2000 as the subprime mortgage crisis spread through global credit markets, spurring investors to sell riskier assets funded by loans made in Japan.

Housing Report

Purchases of new U.S. homes unexpectedly rose 2.8 percent to an annual pace of 870,000 last month, the Commerce Department said yesterday. The level exceeded the highest estimate in a Bloomberg News survey of 73 economists.

The Standard & Poor's 500 Index rose 2.3 percent for the week, the biggest gain since March. The Chicago Board Options Exchange's VIX index of stock volatility fell to 20.70 this week after reaching 37.50, the highest since 2002, on Aug. 16, the day before the Fed cut the discount rate it charges banks.

Interest rate futures show traders are certain the Fed will cut its 5.25 percent target rate for overnight loans between banks at least a quarter-percentage point by its Sept. 18 meeting. Bets a month ago suggested a 10 percent chance of a rate cut.

Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their forecasts for the dollar this week. Goldman said the dollar will weaken to a record of $1.43 in three to six months, from a previous estimate of $1.35. Merrill forecast $1.40 by December, compared with $1.36 before last week.

2007 Economic Growth

``The fundamental picture has deteriorated quite materially for the dollar,'' said Jens Nordvig, a New York- based analyst for Goldman Sachs.

The dollar reached an all-time low of $1.3852 on July 24.

The U.S. economy is forecast to expand 2 percent this year, according to a Bloomberg News survey published Aug. 9. That's 0.1 percent lower than the July forecast.

The yen dropped against all of the 16 most active currencies this week as traders returned to carry trades after the Bank of Japan on Aug. 23 kept its benchmark borrowing cost at 0.5 percent, the lowest among major economies.

Japan's key rate compares with 4 percent in the euro region, 11.5 percent in Brazil and 8.25 percent in New Zealand. The Swiss franc, another source of funding for the carry trade, fell 0.9 percent against the euro this week. Switzerland's benchmark rate is 2.5 percent.

To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: August 25, 2007 00:50 EDT

Saving

Tha portion of income that is not consumed. Saving = income - consumption.