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BLBG: Dollar Posts Biggest Weekly Gain on Currency Funding Demand
By Ye Xie and Daniel Kruger

Oct. 3 (Bloomberg) -- The dollar posted its biggest weekly advance ever against the euro on a surge in demand for U.S. currency funding amid a worldwide credit crunch.

The U.S. currency erased its gain versus the yen on speculation the $700 billion financial bailout approved by Congress today won't be an economic cure-all. The yen dropped against major currencies including the euro and the New Zealand dollar as approval of the rescue encouraged investors to borrow in Japan to buy higher-yielding assets.

``The dollar should continue to do well,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``It's the most liquid asset. This bill won't change the reality that global economic activities will slow down further.''

The greenback rose 5.6 percent this week versus the euro, the biggest increase since the 15-nation currency debuted in 1999. It rose 0.2 percent to $1.3796 at 4:17 p.m. in New York, from $1.3819 yesterday. The dollar fell 0.1 percent to 105.19 yen, from 105.33, declining 0.8 percent this week. The euro dropped 0.3 percent to 145.16 yen, from 145.55. It fell 6.3 percent this week, the biggest drop ever.

Japan's yen fell 0.8 percent to 69.72 against the New Zealand dollar on speculation the bailout will prompt investors to get funds in a country will low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 7.5 percent in New Zealand.

U.S. Bailout

Congress passed a financial-market bailout designed to unlock credit markets, reversing a rejection by the U.S. House of Representatives that caused global stocks to plunge. The bill authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars increased to 4.33 percent today, the highest since January, the British Bankers' Association said. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

``Very strong demand for dollars is still evident,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

U.S. payrolls shrank by 159,000 last month, following a revised decline of 73,000 in August, the Labor Department said today in Washington. It's the biggest loss in jobs since 2003. The unemployment rate stayed at 6.1 percent.

`Dollar Liquidity'

``It's not doing any good for money markets and liquidity given the real economy is starting to freeze up,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The market is short of dollar liquidity.''

The euro was headed for a record weekly drop against the dollar after European Central Bank President Jean-Claude Trichet said yesterday policy makers discussed cutting the main refinancing rate. European economies face ``increasing downside risks,'' he said at a press conference following the decision to keep the benchmark at a seven-year high of 4.25 percent.

The implied yield on the Euribor futures contract expiring in March fell to 4.10 percent, from 4.77 percent a month ago. The Euribor contract has averaged 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show.

Five European banks including Dexia SA, the world's biggest lender to local governments, and Fortis, Belgium's largest financial-services firm, accepted government-backed bailouts this week.

Futures on the Chicago Board of Trade showed an 82 percent chance that the Federal Reserve will cut the 2 percent target lending rate for overnight lending between banks by a half- percentage point at its Oct. 29 meeting, with the balance of bets on a reduction of 0.75 percentage point. Futures showed no chance of reduced borrowing costs a month ago.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net