Dollar Posts Biggest Drop Versus Yen in Almost 2 Months on Jobs

The dollar posted its biggest decline against the yen in almost two months as a slowdown in hiring raised concern that U.S. economic weakness will spread globally.

The U.S. currency fell this week against the euro and Swiss franc as traders priced in for the first time a more than 50 percent chance the Federal Reserve will cut borrowing costs by a half-percentage point on Jan. 30. Import prices were unchanged last month, easing concern inflation is accelerating, the government is forecast by economists to report next week.

The dollar is going to remain on the defensive, said Robert Sinche, head of global currency strategy in New York at Bank of America Corp. He says the U.S. currency may approach the all-time low of $1.4967 per euro reached Nov. 23.

The dollar weakened 3.3 percent this week to 108.60 yen, the biggest drop since November. It decreased to $1.4743 per euro from $1.4723, extending a 2.4 percent plunge the previous week that was the biggest since April 2006, and fell 1.6 percent to 1.1083 Swiss francs.

The yen rose against all of the 16 most actively traded currencies this week as the slowdown in U.S. hiring encouraged investors to cut back on holdings of higher-yielding assets funded in Japan. The Standard & Poor's 500 Index fell 4.5 percent this week, its biggest drop since July.

Japan's currency jumped 3.2 percent to 160.09 per euro, the biggest increase since the week ended Aug. 17, the day the U.S. central bank cut the discount rate to mitigate a global rout in credit markets.

Yen's Advance

The yen increased 3.9 percent against the Australian dollar and 4.4 percent against the South African rand, two favorites of the carry trade.

If the U.S. is going to fall into recession, the world economy will slow down significantly, said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. Investors will shun risky assets and carry trades.

Japan's benchmark lending rate of 0.5 percent, the lowest among major economies, compares with 11 percent in South Africa, 6.75 percent in Australia and 4 percent in the 15 countries that use the euro. In the carry trade, investors borrow in countries with lower lending rates and use the cash to buy assets where higher returns are offered. The risk is that currency fluctuation can erase profits.

U.S. employers added 18,000 positions to their payrolls last month, capping the worst year for job creation since 2003, the Labor Department said yesterday. The median forecast of 74 economists surveyed by Bloomberg News was for 70,000 new jobs. The unemployment rate rose to 5 percent, a two-year high.

`Risk Appetite'

Clearly the labor market is weakening, said Jay Bryson, global economist in Charlotte, North Carolina, at Wachovia Corp. This is not good for global risk appetite.

The U.S. Dollar Index traded on ICE Futures in New York declined 0.6 percent this week to 75.793. The index, valuing the currency's performance against those of six of the biggest U.S. trading partners, has had the worst start of a year since the turn of the millennium.

The chance the Fed will reduce the benchmark lending rate of 4.25 percent by a half-percentage point on Jan. 30 rose to 66 percent from 34 percent two days ago and no chance a week ago, interest rate futures contracts on the Chicago Board of Trade showed. The odds of a quarter-point cut were 34 percent.

Prices of goods imported into the U.S. were unchanged in December after a 2.7 percent increase the previous month, according to the median forecast of 35 economists surveyed by Bloomberg News. The Labor Department report is due Jan. 11.

China's yuan advanced against the dollar for a fourth week, rising 0.4 percent to 7.274 per dollar, as a local newspaper reported that the central bank signaled it will allow faster gains in the currency to help curb inflation.

Source - Bloomberg