BLBG: Dollar Heads for Weekly Loss Versus Yen Before Payrolls Report
By Stanley White
Oct. 3 (Bloomberg) -- The dollar fell against the yen, headed for a third weekly loss, before a government report that will probably show a deepening credit crunch contributed to the biggest drop in employment in more than five years.
The dollar declined for the third day against the yen on speculation the U.S. economy will weaken regardless of whether lawmakers pass a bill to buy troubled assets from banks in a vote today. The euro headed for its largest ever weekly slump versus the greenback after European Central Bank President Jean- Claude Trichet said yesterday policy makers discussed cutting the benchmark interest rate before holding it at 4.25 percent.
``The dollar will go lower against the yen because U.S. economic fundamentals are weak and no bailout package will change that right away,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust & Banking Co., a unit of Japan's largest brokerage. ``The ECB has opened the door to a rate cut, so the euro will face another wave of selling.''
The dollar traded at 105.06 yen at 12:15 p.m. in Tokyo from 105.33 yesterday. The euro bought $1.3843 from $1.3819 yesterday, when it touched a one-year low of $1.3748. The euro was at 145.34 yen from 145.55 yen, after touching 144.57, the lowest level since June 2006. The dollar may decline to 104.20 yen and the euro may fall to $1.3270 today, Amikura said.
For the week, the dollar declined 1 percent against the yen. The euro declined 5.3 percent versus the dollar and 6.2 percent against the yen, the biggest weekly drops since the 15-nation currency's debut in January 1999.
Against the dollar, the South African rand climbed to 8.4662 from 8.5163, the Swiss franc gained to 1.1323 from 1.1357 and the British pound advanced to $1.7676 from $1.7639.
U.S. employers probably eliminated 105,000 jobs last month, after slashing 84,000 in August, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington. The unemployment rate held at a five-year high of 6.1 percent, according to a separate survey.
``There's a high chance the dollar falls against the yen,'' 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. ``The market is likely to price in bad jobs numbers and the chance of a Fed rate cut. We're in the middle of a string of disappointing economic data.''
Futures on the Chicago Board of Trade yesterday showed a 94 percent chance the Fed would cut its 2 percent target rate for overnight lending between banks by a half-percentage point on Oct. 29, with the balance of bets on a quarter-point reduction. Futures showed no chance of lower rates a month ago.
U.S. Bank Bill
The U.S. House of Representatives is likely to vote today on the latest version of a $700 billion bank rescue, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi. The Senate voted 74-25 on Oct. 1 in favor of legislation that links the rescue of the financial industry to an increase in bank- deposit insurance limits and tax breaks after the House rejected an earlier version of the bill.
Investors should sell the euro at 145 yen with a target of 135 yen after the ECB signaled it may lower borrowing costs for the first time in five years, Morgan Stanley said.
``Growth prospects in the Eurozone are dimming quickly and may force the ECB's easing hand sooner rather than later,'' New York-based Sophia Drossos and Yilin Nie, strategists at Morgan Stanley, wrote in a research note yesterday.
European economies face ``increasing downside risks,'' Trichet said at a Frankfurt press conference following the decision to keep borrowing costs on hold. Five European banks including Dexia SA, the world's biggest lender to local governments, and Fortis, Belgium's largest financial-services firm, have accepted state-backed bailouts this week.
The implied yield on the Euribor futures contract expiring in March fell to 4.18 percent yesterday, from 4.77 percent a month ago. The euribor contract has been an average of 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show.
``The euro is likely to depreciate further against the yen,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``The ECB may begin easing policy next month. The focus is moving to European financial instability.''
Implied volatility on one-month euro options against the yen was at 20.54 percent, near the highest in more than eight years on concern the credit-market crisis may deepen. Volatility reached 21.04 percent yesterday, the most since March 2000. Higher volatility may discourage so-called carry trades as it indicates a larger risk of exchange-rate fluctuations.
U.S. Currency Funding
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
The dollar rose against all of the 16 most-active currencies except the yen yesterday as demand for U.S. currency funding increased, reflecting the reluctance of banks to lend.
The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans climbed 6 basis points to 4.21 percent yesterday, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to 5.32 percent.
To contact the reporter on this story: Stanley White in Tokyo at firstname.lastname@example.org;