Dollar Falls to Record Against Euro as Credit Concern Spreads

Dollar Falls to Record Against Euro as Credit Concern Spreads

http://www.bloomberg.com/apps/news?pid=20601087&sid=axpjBSgK8pgc&refer=home

By Bo Nielsen and Min Zeng

July 24 (Bloomberg) -- The dollar declined to a record against the euro and weakened to a 26-year low versus the pound on speculation the rout in subprime mortgages is spreading, slowing U.S. growth.

The currency's drop accelerated after Countrywide Financial Corp., the biggest U.S. mortgage lender, reported a third straight quarterly earnings decline as more consumers fell behind on home equity loan payments. The yen gained versus all but one of the 16 most actively traded currencies as U.S. stocks fell and traders pared so-called carry trades in which they borrow in the yen to invest in higher-yielding assets.

``The Countrywide report simply added to the dollar selling,'' said Tom Fitzpatrick, global head of currency strategy in New York at Citigroup Global Markets Inc. ``The concern is that we are starting to see the subprime issues spread into the credit market, which will knock on growth.''

The dollar dropped to $1.3816 per euro at 12:24 p.m. in New York from $1.3807 yesterday after reaching a record of $1.3852. The U.S. currency fell 0.37 percent to 120.65 yen after touching 120.41, the weakest since May 16. The dollar fell to 2.0654 per pound, the lowest since May 1981, before trading at 2.0622.

An index of the dollar's value against six major currencies fell to 80.14, near the lowest since 1995. A slump below 80, last reached in September 1992, might trigger a drop to 76, according to Brian Garvey, senior currency strategist in Boston at State Street Global Markets.

The U.S. currency fell to the lowest against the New Zealand dollar since March 1985 and the weakest versus Australia's currency since February 1989 as the benchmark Standard & Poor's 500 Index dropped as much as 1 percent.

Blackstone Hired

Basis Capital Fund Management Ltd., an Australian-based hedge fund, said it hired Blackstone Group LP as an adviser after two of its funds ran into trouble by investing in the unrated, riskiest portions of so-called collateralized debt obligations. These portions are first in line for any losses when borrowers fall short on mortgage payments.

``Two factors are in play against the dollar here: credit concern and interest rate outlook,'' said State Street's Garvey, whose firm is one of the world's largest custodians of investor assets, with $12.3 trillion under management. ``We are recommending investors to short the dollar.''

The yield advantage of a 10-year Treasury note compared with a comparable German bund was 0.51 percentage point, about halved since September.

At least 35 bond and loan deals worldwide have been pulled, delayed or restructured in the past five weeks, according to Bloomberg data. A National Association of Realtors report tomorrow may show U.S. existing-home sales dropped last month to the lowest in four years.

Carry Trade Risk

The implied volatility of a one-month dollar-yen option touched 8.05 percent for a second straight day, the highest since April 20, making carry trades more risky.

The yen gained 0.29 percent to 166.72 versus the euro as traders scaled back risky investments. Japan's currency fell to an all-time low yesterday.

Japan's key overnight lending rate of 0.50 percent is the lowest among major economies. The benchmark rate is 11.50 percent in Brazil, 8 percent in New Zealand and 6.25 percent in Australia.

The yen's gains may abate before a report on July 27 forecast to show Japan's consumer prices probably fell for a fifth straight month, undermining the case that inflation will take hold and the central bank will raise rates.

Core consumer prices excluding fresh food dropped 0.1 percent in June from a year earlier, according to the median forecast of 44 economists surveyed by Bloomberg.

`Inflationary Pressure'

``If Japan's inflationary pressure goes negative, it would take away the rationale behind a rate hike this year, and the yen could weaken,'' said Jason Schenker, an economist in Charlotte, North Carolina, at Wachovia Corp.

The Canadian dollar rose to a 30-year high against the U.S. dollar after a government report showed May retail sales surged at the fastest pace in almost a decade, bolstering speculation the central bank will increase interest rates.

Canada's currency had the biggest gain today against its U.S. counterpart among the most actively traded currencies.

The Canadian dollar rose 1.05 percent to 96.53 U.S. cents after reaching 96.57 U.S. cents, the highest since February 1977. It rose 0.71 percent to 116.51 versus the yen.

The Canadian currency might reach parity with the dollar over the next ``two or three months,'' Fitzpatrick said.

The currency has gained 11 percent this year versus the dollar and 12 percent against the yen on a strengthening economy and surging commodity prices.