Dollar Falls in Two Months

The dollar fell to the lowest in more than two months against the yen and weakened against the 15 other most-active currencies on speculation that subprime mortgage losses will deepen and reduce demand for U.S. assets.

The slide accelerated after the dollar reached levels that triggered automatic orders to sell the currency. The dollar also slumped to a 26-year low against the British pound and the weakest since March 1985 against New Zealand's currency. It slid for a 13th day versus the Australian dollar.

``Weakness in the credit market may impact other financial markets and this will pressure the dollar,'' said Satoru Ogasawara, foreign exchange analyst and economist at Credit Suisse Group in Tokyo. ``People are also concerned about stagnation in the housing market and the impact on consumers.''

The dollar dropped to 120.41 yen, the weakest since May 16, before trading at 120.52 at 1:08 p.m. in Tokyo from 121.09 late in New York yesterday. It also touched $2.0647 versus the pound, the lowest since May 1981. It was at $1.3823 per euro from $1.3807 and may weaken to $1.40 in two weeks, Ogasawara said.

The yen's advance accelerated after it reached 120.90 versus the dollar, where there were orders to buy the currency, said Akihiro Tanaka, senior currency dealer in Tokyo at Resona Bank Ltd. The yen may rise to 120.30 a dollar today, Tanaka said.

The yen gained against all of the 16 most-active currencies on speculation losses from subprime mortgages will prompt investors to pare riskier assets funded by borrowing cheaply in Japan, known as carry trades.

Dollar Minus

The Fed's major currency trade-weighted dollar index, a broad measure of the currency's value, fell to 77.01 on July 20, the lowest since 1971, from 77.15 on July 19. The U.S. dollar dropped to the least since New Zealand's currency was freely traded 22 years ago, reaching 81.10 cents. Australia's dollar reached 88.63 cents, the most since February 1989.

The U.S. currency also extended this month's slide to 2 percent versus the euro before a National Association of Realtors report tomorrow that may show U.S. existing-home sales dropped last month to the lowest in four years.

Federal Reserve Chairman Ben S. Bernanke testified before Congress last week that there will be ``significant'' losses on loans to homeowners with poor credit.

``The subprime problems in the U.S. may deepen,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``It's a minus for the dollar,'' which may decline to $1.3840 today, Ishikawa said.

Sales of existing homes probably slid to 5.87 million in June from 5.99 million the previous month, according to the median forecast of 70 economists surveyed by Bloomberg. The Commerce Department will report on July 26 that new home sales fell last month to 890,000, close to the lowest in almost seven years, according to a separate Bloomberg survey.

Barrier Options

The Fed's benchmark interest rate has been unchanged since policy makers boosted it to 5.25 percent in June 2006, while the Bank of England has lifted rates five times since August to 5.75 percent. Federal funds futures showed the likelihood of a decrease in the target rate for overnight lending between banks in December rose to 26 percent from 22 percent a week earlier.

Gains in the euro may stall around $1.3850 because of options that will lose money beyond that level, said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. Options give holders the right to buy or sell a currency at a set price at a fixed date.

Reducing Yen Shorts

The yen gained as investors reduced bets against the currency. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 126,773 on July 17, compared with net shorts of 125,890 a week earlier, according to the Washington-based Commodity Futures Trading Commission. The data are sometimes used as a contrary indicator.

``Investors are reducing yen short positions, not only against the dollar but also against yen-crosses,'' said Soichiro Mori, foreign-exchange strategist in Tokyo at Himawari Securities, Inc., a foreign-exchange margin trading company. ``This could be triggered by concern over the U.S. subprime issue.''

Japan's key overnight lending rate of 0.50 percent is the lowest among major economies. The benchmark rate is 11.50 percent in Brazil, 8 percent in New Zealand and 6.25 percent in Australia. The yen has weakened the most this year versus Brazil's real.

Against the yen, the Brazilian real dropped to 65.5459 from 65.8510 and the Australian dollar fell to 106.54 from 107.01.

source:bloomberg.com