Dollar Falls to 12-Year Low Versus Yen, Record Low Against Euro
By Ye Xie and Bo Nielsen
March 14 (Bloomberg) -- The dollar sank below 99 yen, to the weakest in 12 years, and slumped to a record low versus the euro after JPMorgan Chase & Co. and the New York Federal Reserve bailed out Bear Stearns Cos., as credit market losses widen.
The U.S. currency also plunged to below one Swiss franc for the first time as traders speculated the Fed will slash interest rates one percentage point next week to avert a recession. As investor confidence tumbled, stocks plunged and gold climbed to a record high of $1,009 an ounce.
``The initial reaction is to sell the U.S., sell the dollar, sell the equities,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. ``This is bad news. It's definitely a confirmation of the reality that U.S. financial institutions are having a hard time.''
The dollar sank to 98.90 yen, the lowest since September 1995. It traded at 99.32 yen at 4 p.m. from 100.65 late yesterday. The U.S. currency plunged to $1.5688 per euro, the weakest since the European currency's 1999 debut. It traded at $1.5671 per euro from $1.5635 yesterday and $1.5355 a week ago. It declined a fifth straight week against the euro, the longest slide since November. It reached as weak as 0.9988 francs per dollar, from 1.0093 francs yesterday.
The dollar lost about 16 percent against the euro and 18 percent versus the franc in the past year as the worst housing slump since 1991 forced the Fed to cut rates 2.25 percentage points to bolster the economy, lowering returns on dollar deposits. It sank 15 percent against the yen in that period.
`Big Kahuna'
The yen rose to 155.58 per euro from 157.35 as the announcement on Bear Stearns led traders to exit so-called carry trades, in which they obtain cheap loans in Japan and use the funds to buy higher-yielding assets elsewhere. The euro fell to 1.5649 Swiss francs, close to the lowest since July 2006.
The Standard & Poor's 500 index lost 2.1 percent. U.S. debt rallied, pushing two-year yields to the lowest since July 2003.
``Confidence in the dollar is down,'' said Kenneth Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts, in an interview on Bloomberg TV. ``We're seeing the big kahuna in the currency markets that many of us have been calling for for a long time.''
The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today. Bear Stearns Chief Executive Officer Alan Schwartz said in a separate statement that the firm's ``liquidity position in the last 24 hours had significantly deteriorated.'' Bear Stearns shares fell 47 percent in New York trading.
`More Rate Cuts'
The world's largest banks and securities firms wrote down $195 billion of assets linked to the subprime mortgage market since the start of 2007.
The likelihood the Fed will cut its target rate by one percentage point to 2 percent next week rose to 50 percent, from zero percent yesterday, futures on the Chicago Board of Trade showed. The balance of bets is on a cut to 2.25 percent. The central bank has reduced rates five times since September, from 5.25 percent. Traders also see a 50 percent chance of a cut to 1.75 percent in April. The euro region's main rate is 4 percent.
The bailout ``argues for more rate cuts,'' said Samarjit Shankar, director of global strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank with over $20 trillion in assets under administration. ``It's an ongoing credit crisis.''
Government data showed consumer prices were flat last month, giving the Fed room to cut rates. At 1.45 percent, two- year Treasuries yielded 1.76 percentage point less than similar- maturity German debt, close to the widest gap since 1993.
Yen, Franc Soar
The yen and franc rose against major currencies, including about 2 percent against Australia's dollar. The gains came as demand evaporated for the carry trade, where traders borrow cheaply in Japan and Switzerland and invest in countries such as Australia, where the benchmark rate is 7.25 percent. Japan's main rate is 0.5 percent. Switzerland's is 2.75 percent.
Currency volatility surged in recent weeks, increasing the risk of carry trades. One-month volatility on dollar-yen options was 16.5 percent, up from about 10.5 percent at the end of last month. Currency swings can erase profits from rate gaps.
The dollar gained earlier on speculation global central banks will join forces to support it for the first time since 1995, when it sank to a post-World War II low of 79.75 yen.
Policy makers have stepped up their rhetoric to break the slide in the past week.
`Excessive' Volatility
European Central Bank council member Klaus Liebscher said he's ``very concerned'' about the dollar's ``dramatic'' decline, Dow Jones Newswires reported today, citing an interview. He also said recent currency volatility is ``excessive.'' Japanese Finance Minister Fukushiro Nukaga said today abrupt currency moves are ``bad'' for economic growth.
The Group of Seven, which next meets April 12-13 in Washington, said when they met in February in Tokyo that ``excess volatility and disorderly'' movements are ``undesirable.'' They also urged to China to accelerate the yuan's appreciation.
The G-7 may signal its intent to consider coordinated intervention, strategists at UBS AG, the world's second-biggest currency trader, wrote in a March 3 report. The group comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada.
Goldman Sachs Group Inc. and Morgan Stanley said coordinated action by policy makers to stem the currency's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates.
President George W. Bush said today the U.S. believes in a ``strong dollar.''
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