Dollar Falls on Bets for 75 Basis Point Fed Interest Rate Cut

Oct. 29 (Bloomberg) — The dollar fell for a second day against the euro on bets the Federal Reserve will lower interest rates by as much as three quarters of a percentage point today.

The U.S. currency also declined against the yen and the British pound on speculation the central bank will continue lowering borrowing costs as rising unemployment and sliding home values cause the world’s largest economy to contract. The yen rebounded from a record loss against the euro on concern slowing global economic growth will limit demand for higher-yielding currencies.

“When the dust settles, the dollar’s fundamentals will pressure it to go lower,” said Masahiro Sato, joint general manager of the treasury division in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest publicly listed lender. “Traders will focus more on falling rates and the rising costs of fixing the U.S. economy.”

The dollar weakened to $1.2730 per euro at 11:29 a.m. in Tokyo from $1.2683 late yesterday in New York. It fell to 97.50 yen from 98.03. The yen rose to 124.11 per euro from 124.32, after a 6.8 percent drop yesterday. The dollar may drop to 90 yen by year-end, Sato said.

The pound rose to $1.6025 from $1.5901, while the dollar fell to 1.1537 Swiss francs from 1.1595. The South Korean won rose to 1,399.10 per dollar from 1,467.90, its biggest gain in two weeks, after overseas investors turned net buyers of the country’s stocks.

U.S. Rates

The Federal Reserve will lower its 1.5 percent target lending rate by a half-percentage point at the conclusion of its two-day policy meeting today, according to the median forecast of 69 economists surveyed by Bloomberg News. Policy makers are scheduled to announce the decision at 2:15 p.m. in Washington. Futures on the Chicago Board of Trade show a 46 percent chance the central bank will cut rates by three-quarters of a point.

U.S. consumer confidence slumped to a record low this month, a report showed yesterday. U.S. gross domestic product shrank by 0.5 percent in the third quarter for its biggest decline since the 2001 recession, data tomorrow may show, according to a separate survey.

“The Fed may move to a zero interest rate policy,” Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. “A worsening economic outlook suggests an increasing likelihood of additional rate cuts.”

The yen rebounded from its biggest one-day decline against the dollar since 1974 on speculation a rate cut from the Bank of Japan won’t stem its recent gains. The BOJ is “leaning toward” reducing its target rate by a quarter-percentage point to 0.25 percent when it announces a policy decision on Oct. 31, the Nikkei newspaper reported without citing anyone.

Yen Surge

“Twenty-five basis points isn’t really going to change the bigger scheme of things that much,” said Ashley Davies, a currency strategist in Singapore at UBS AG, the world’s second- largest foreign exchange trader. “The European Central Bank and the Bank of England are sequentially cutting rates whereas these are more of one-off adjustments for the Fed and the BOJ.”

He said the yen will gain to 90 per dollar in one month because global fund managers still need to “de-leverage.” The yen is a popular currency to fund carry trades, in which purchases of higher-yielding assets are funded in countries with lower rates.

The yen rose 0.7 percent to 62.39 per Australian dollar. Japan’s currency has jumped 20 percent versus the euro, 33 percent against the Australian dollar and 27 percent versus the New Zealand dollar this month as the global credit crisis and a stock rout erased more than $12 trillion in equity value.

Not Over Yet

“What has been driving the yen stronger is not speculative positions but the repatriation of Japanese investors and deleveraging by global investors,” said Sophia Drossos, a strategist at Morgan Stanley in New York. “The trend is not over yet.”

The gain in the yen has eroded Japanese exporters’ overseas income. Honda Motor Co., Japan’s second-largest automaker, cut its operating profit forecast for the year ended in March 2009 by 13 percent to 550 billion yen ($5.6 billion).

The Group of Seven issued an unscheduled statement on Oct. 27 saying it was concerned “about the recent excessive volatility” in the yen. Japanese Finance Minister Shoichi Nakagawa said his country is ready to act in currency markets if necessary. Governments intervene in foreign exchange markets by arranging purchases and sales of currencies.

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