Dollar Falls on Concern U.S. Reports Will Signal Slower Growth

Bloomberg
May. 30, 2006

May 30 (Bloomberg) -- The dollar had its first two-day drop against the euro and yen in two weeks before an industry report today that is expected to show weaker U.S. consumer confidence.

The U.S. currency has declined 7.5 percent against the euro and 4.8 percent versus the yen this year on speculation signs of slowing growth will deter the Federal Reserve from adding to 16 straight interest-rate increases to 5 percent from 1 percent.

``Confidence is starting to falter in the U.S., and you would expect that, given 400 basis points of tightening,'' said Callum Henderson, head of currency strategy at Standard Chartered Plc in Singapore. ``The dollar is still headed down.''

The dollar weakened to $1.2813 against the euro at 2:14 p.m. in Tokyo, from $1.2751 in late New York yesterday. The currency bought 112.03 yen, from 112.46 yen.

The Conference Board will today say its index of consumer confidence fell to 100 in May, from 109.6 the previous month, according to the median forecast of 61 economists surveyed by Bloomberg News. On June 1, the Institute for Supply Management will report its gauge of manufacturing in May declined to 55.6, from 57.3 a month earlier, a separate survey shows.

Fed policy makers have said further increases depend on the outlook suggested by economic data. Interest-rate futures show traders are pricing in a 56 percent chance the central bank will push rates to 5.25 percent at a meeting on June 29, down from 60 percent on May 22.

``There is an enormous amount of data that will be coming out in the next four weeks or so,'' which is ``where we will start to see more information about the lagged effects of interest rates, energy and commodity prices'' Federal Reserve Governor Randall Kroszner said last week.

`Yen Negative'

The yen initially fell as Japanese government reports on industrial production and consumer spending dimmed prospects the Bank of Japan will lift rates from zero percent in months ahead.

The reports prompted traders to scale back bets on when the central bank will move amid remarks by Governor Toshihiko Fukui today that the timing depends on the economy and prices. Nine of 16 economists Bloomberg surveyed from May 11 to May 16 said the central will raise borrowing costs as early as July.

``Today's figures are yen negative,'' said Masaki Fukui, a senior market economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``The figures show a weaker Japanese economic footing. This may raise concern the BOJ shouldn't hurry to raise rates.''

The yen may weaken to 113 per dollar this week, he said.

Yen Futures

Industrial production rose 1.5 percent seasonally adjusted in April, the biggest gain since November, the trade ministry said in Tokyo today. The result was below the 1.8 percent median forecast of 40 economists surveyed by Bloomberg News. From a year earlier, output rose 3.8 percent.

The statistics bureau said in a separate report that spending by households fell 2 percent in April from a year ago, more than the 1.4 percent median decline forecast by economists.

Three-month Euroyen futures show traders have fully priced in an increase in the central bank's target for overnight loan rates of a quarter percentage point by September.

Contracts for September 2006 delivery yielded 0.51 percent today. Euroyen futures settle to a three-month Tokyo interbank lending rate that averaged about 0.51 percent when the central bank kept its target rate at 0.25 percent from Aug. 11, 2000, to Feb. 27, 2001, according to data compiled by Bloomberg.

Snow Replaced?

The dollar extended losses on speculation Donald Evans, a close friend of U.S. President George W. Bush and a former secretary of commerce, is the frontrunner to succeed John Snow as the U.S. Treasury Secretary, said an administration official, who added that a final decision hasn't been made.

A change at the helm of the Treasury may boost prospects the Bush administration will shift its ``strong dollar'' policy in favor of a weaker dollar in the coming months.

Snow, whose future has been the subject of speculation since Bush won re-election in 2004, wants to leave the administration by the end of June, said Republicans with ties to the Treasury. Snow may announce his departure as soon as this week, said the administration official.

Losses in the dollar accelerated after it fell through 112.30 yen and $1.28 versus the euro, where traders had pre-set orders to sell the U.S. currency, said Gen Kawabe, a currency manager in Tokyo at Chuo Mitsui Trust and Banking Co. Ltd.

Traders sometimes place automatic orders to limit losses in case bets go the wrong way.