Dollar May Extend Drop After G-7 Fails to Address Record Slide

The dollar, trading at an all-time low against its major trading partners, may extend the decline after the Group of Seven failed to address the drop following a meeting of finance officials.

The policy makers, representing the U.S., U.K., Japan, Germany, Italy, France and Canada, stuck to language in prior statements by saying excess volatility' in currencies is undesirable and that currencies should trade in line with fundamentals. They also intensified calls for China to let its currency strengthen, during yesterday's gathering in Washington.

The dollar is going to be under pressure as the growth outlook weakens. Risk aversion is the focus now. The dollar dropped this week by the most in two months versus the yen, on concern the U.S. housing slump will rekindle a credit market sell-off.

The yen rose against the 16 most-actively traded currencies this week as a decline in global stocks prompted investors to sell assets funded by loans in Japan. A report next week is forecast to show existing home sales in the U.S. fell to the lowest since 2001 in September.

Sell the Dollar

The dollar fell 2.6 percent to 114.51 yen, from 117.61 on Oct. 12, the biggest weekly decline since the period ended Aug. 17. The U.S. currency weakened 0.9 percent to $1.4301 per euro. It touched an all-time low of $1.4319 yesterday.

The statement gives the market a green light to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million of funds under management. With no comment from the G-7 about its weakness, the dollar could decline to $1.45 per euro in a month.

An Oct. 24 report from the National Association of Realtors may show sales of existing homes fell to an annualized 5.25 million last month, from 5.5 million in August, according to the median estimate of 64 economists surveyed by Bloomberg News.

The International Monetary Fund cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent on concern the sell-off in the credit markets will cut business and consumer spending.

Risk Aversion

Increased risk aversion caused investors to pare carry trades financed by yen. In such transactions, investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates.

The trades have pushed the yen down 8.9 percent versus the euro and 12 percent against the Australian dollar in the last 12 months. The Japanese currency gained 1.8 percent to 163.79 versus the euro this week, the biggest increase since the period ended Aug. 17.

The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will cut its benchmark interest rate a quarter percentage point to 4.5 percent on Oct. 31. The odds were 32 percent a week ago. The chance of another rate cut in December to 4.25 percent is 74 percent, up from 15 percent on Oct. 12.

Source - Bloomberg