Dollar Touches One-Year Low as Fed May Signal Rates to Stay Low

Sept. 23 (Bloomberg) -- The dollar touched a one-year low against the euro and weakened versus the yen on speculation Federal Reserve policy makers will signal today they will keep interest rates low, diminishing the allure of U.S. assets.

New Zealand’s dollar rose against all of the 16 major currencies after a government report showed the economy unexpectedly expanded for the first time in six quarters, spurring investors to buy higher-yielding assets. The yen rose toward a seven-month high versus the dollar on prospects Group of 20 leaders, meeting in Pittsburgh starting tomorrow, will call for a reduction in global trade imbalances that may cause further gains in the U.S. currency’s counterparts.

“Our view is that the Fed won’t change its statement, so we’d be very surprised if they changed the reference to exceptionally low levels of the fed funds rate,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “We are broadly bearish on the dollar. The improving global picture tends to produce selling of the dollar.”

The dollar traded at $1.4797 per euro as of 11:07 a.m. in Tokyo from $1.4790 in New York yesterday, after earlier declining to $1.4842, the lowest level since Sept. 22, 2008. The U.S. currency was at 1.0234 Swiss francs, after earlier falling to 1.0189 francs, the weakest since July 22, 2008.

The yen climbed to 90.82 per dollar from 91.10, and rose to 134.40 per euro from 134.76. New Zealand’s dollar advanced to as high as 73.12 U.S. cents, the strongest since Aug. 4, before trading at 72.60 cents from 71.89 cents.

Fed Meeting

The Federal Open Market Committee will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflected Fed orders to banks to raise more capital and toughen lending standards, analysts said.

All 93 economists surveyed by Bloomberg said the Fed won’t change interest rates at its two-day policy meeting ending today. Chairman Ben S. Bernanke and his colleagues may discuss how to wind down purchases of mortgage-backed securities, analysts said.

“You’ve obviously got some risks with the Fed, but unless they come out and surprise with being hawkish, which I don’t think they will, it’s another reason dollar bears will feel comfortable with their position,” said Phil Burke, chief foreign-exchange dealer at JPMorgan Chase Bank in Sydney.

Stop-Loss Orders

The dollar slumped earlier due to the activation of so- called stop-loss orders, Burke said.

“The dollar-yen started that move off going through 91 and that turned into Dollar-Index break through 76,” he said. “It was a dollar-yen move initially, which turned into a Dollar- Index move, and it all got pretty messy and nasty.”

A stop-loss order is an automatic instruction to sell or buy a currency should it reached a particular level.

The Dollar Index, which the ICE uses to track the dollar against the currencies of six major U.S. trading partners, dropped to as low as 75.939, the weakest since Sept. 22, 2008, before trading at 76.008 from 76.118.

The New Zealand dollar rose to its highest since August 2008 versus the U.S. currency after Statistics New Zealand said gross domestic product grew 0.1 percent in the three months to June 30, following a 0.8 percent drop in the first quarter. The median estimate in a Bloomberg News survey was for a 0.2 percent contraction.

“Early in the session the market was looking for direction and the kiwis gave it,” said Tony Bieber, a foreign-exchange trader at Suncorp-Metway Ltd. in Brisbane. “The kiwis are leading the charge against the U.S. dollar.”

New Zealand Rates

Traders are betting the Reserve Bank of New Zealand will raise its benchmark interest rates by 1.49 percentage points over the next 12 months, compared with a prediction for 1.36 percentage points yesterday, according to a Credit Suisse Group AG index based on overnight swaps.

The yen gained for a second day against the dollar on speculation world leaders will discuss policies to rebalance global economic growth at the G-20 meeting this week.

Policy makers need to promote a “sustained growth track and facilitate global adjustment, as well as structural reform which will need to be undertaken in both deficit and surplus countries,” Dimitri Soudas, a spokesman for Canadian Prime Minister Stephen Harper, told reporters in Ottawa on Sept. 21.

“The dollar remains under selling pressure as the G-20 summit moves toward reforming the international monetary system,” Philip Wee, a senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today.

‘Market Manipulation’

Losses in the dollar may be tempered after Italian Prime Minister Silvio Berlusconi and Australian Prime Minister Kevin Rudd wrote to U.S. President Barack Obama urging him to lead the fight against financial speculation and make it the center of the G-20 summit.

“We would like to bring financial speculation and market manipulation, particularly for raw materials, to the center of the debate,” Berlusconi and Rudd said in their letter, a copy of which was posted on the Italian leader’s Web site.

The Reuters/Jefferies CRB Index of 19 commodities rose the most in a week yesterday. Crude oil traded near $72 a barrel after climbing 2.6 percent yesterday.

“Back in mid-June, the G-8 meeting revealed clear evidence of disquiet in commodity prices,” Sue Trinh, a senior currency strategist in Sydney at RBC Capital Markets, wrote in an e-mail to Bloomberg today. “Following that June communiqué, major commodity indices slumped around 10 percent in the following week. In foreign exchange, risk proxies followed commodity prices lower.”