Dollar falls amid concerns economy is slowing and Fed may ease

By Daniel Kruger and Min Zeng
Bloomberg News Service
Tuesday, November 21, 2006

http://www.bloomberg.com/apps/news?pid=20601101&sid=aMSxSlXfkBUQ

NEW YORK -- The dollar declined against the euro and yen as traders speculated the economy may be slowing enough for the Federal Reserve to reduce interest rates.

The number of regional Fed banks voting not to boost borrowing costs increased as President Bush's Council of Economic Advisers lowered its growth forecast for 2007.

"The Fed is on hold, or maybe cutting, early next year," said Greg Salvaggio, vice president of capital markets at currency-trading company Tempus Consulting in Washington. "This seems to be the side of the market everybody's concerned about."

The dollar dropped to $1.2844 per euro at 5 p.m. in New York, compared with $1.2816 late yesterday. The U.S. currency traded at 117.92 yen from 118.05.

The Dallas Fed Bank board switched its vote and joined directors of 10 other Fed banks in deciding to leave the discount rate unchanged on Oct. 12, according to minutes of central bank meetings released today in Washington. That leaves the Richmond Fed the only holdout for a tighter policy.

U.S. economic growth will slow in 2007 compared with this year, reflecting a weaker housing market, and inflation will increase, President George W. Bush's economic advisers said in their semi-annual forecast.

The gross domestic product will grow 2.9 percent next year, down from 3.1 percent this year, and slower than the 3.6 percent growth forecast in June, the Council of Economic Advisers said.

The U.S. economy expanded at an annual rate of 1.6 percent in the three months through September, the slowest pace in more than three years, the government said last month. Housing starts tumbled to the lowest level in six years last month, the Commerce Department said last week.

Federal Reserve Governor Kevin Warsh said inflation in the U.S. is still too high and there are "clear" risks it won't slow as investors expect, while the economy should rebound from its third-quarter performance.

"Inflation, though down somewhat from its level earlier this year, remains uncomfortably elevated," Warsh said today in prepared remarks at the New York Stock Exchange. "Financial market prices imply that inflation will continue its gradual but persistent downward track during the forecast period. There remain, I believe, clear upside risks to that inflation outlook."

"The market is still looking for reasons to sell the U.S. dollar," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

Investors see a 40 percent chance the central bank will cut the overnight interest rate on loans between banks at its March 21 meeting, compared with 17 percent odds on Nov. 15. The Fed has left the rate unchanged for the past three months at 5.25 percent, after two years of 17 quarter-percentage point increases.

The yen was little changed against the euro, trading near a record low, as minutes of the Bank of Japan's policy meeting in October stoked speculation among traders it will delay raising interest rates until next year.

The economy is "likely to expand moderately" and rates will be "gradually" pushed higher, according to the minutes, released today. The yen has fallen against 14 of the 16 most-active currencies tracked by Bloomberg since the central bank lifted borrowing costs for the first time in almost six years on July 14, as investors cut bets on a second increase this year.

"They have no intention to raise interest rates before the end of the year," said Michael Woolfolk, senior currency strategist at the Bank of New York. "Consequently, the yen remains under pressure."

The yen traded at 151.46 per euro compared with 151.27 late yesterday. It reached a record low of 151.67 yesterday.

The Japanese currency has dropped 1.5 percent versus the dollar since the Bank of Japan's July interest-rate increase. The central bank's next policy meeting is scheduled for Dec. 18-19.

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