Dollar Falls Below 97 Yen, First Time Since 1995, as Fed Cuts

The dollar fell below 97 yen for the first time in 12 years after the Federal Reserve cut its discount rate and financed a bailout of Bear Stearns Cos. by JPMorgan Chase & Co.

The dollar also dropped to a record low against the euro and the Swiss franc after the Daily Telegraph said yesterday Goldman Sachs Group Inc. will reveal $3 billion in writedowns when it releases quarterly earnings tomorrow. The dollar earlier trimmed losses after the Fed unexpectedly cut its discount rate by half a percentage point. Traders have also increased bets the Fed will slash the benchmark federal funds rate by 1 percentage point tomorrow.

The Fed's measures just provided a temporary impact, said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc, the U.K.'s second- biggest bank. But those liquidity injections won't solve the problems. The injection of public money should be really needed. The dollar may fall to 96 yen this week.

The dollar fell to as low as 96.58 yen, the weakest since Aug. 28, 1995, before trading at 96.71 yen at 9:32 a.m. in Tokyo from 99.09 yen late in New York on March 14. Against the euro, the dollar fell to a record low of $1.5807. The dollar fell to an all-time low of 0.9804 Swiss francs.

The dollar also set record lows against the euro the previous four days as investor confidence tumbled, sending U.S. stocks lower for a third straight week and driving gold to a record high of $1,009 an ounce.

Fed Meeting

Easing monetary policy, ongoing uncertainties in the financial sector and rising fears of capital outflows are chief reasons for our short-term bearish outlook.

The U.S. currency has lost about 16 percent against the euro and 17 percent versus the yen in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate 2.25 percentage points to bolster the economy, lowering returns on dollar deposits.

The New York Fed agreed to provide financing through JPMorgan for up to 28 days after Bear Stearns said its liquidity position had significantly deteriorated. Bear Stearns shares fell 47 percent in New York trading.

The likelihood the Fed will cut its target rate for loans between banks by one percentage point to 2 percent at a meeting tomorrow rose to 56 percent on March 15, up from 6 percent a week earlier, futures on the Chicago Board of Trade showed. The balance of bets is on a cut to 2.25 percent. The euro region's main rate is 4 percent.

The dollar briefly recouped some of its losses after the Fed, in an emergency move, lowered the discount rate at which commercial banks borrow from the central bank to 3.25 percent from 3.50 percent. Primary dealers can borrow at the discount rate in exchange for a broad range of collateral, the Fed said in a statement today.

Goldman Sees Brief US Recession, Trims Rate Forecast To 2.5%

Recession isn't just a market buzz anymore. It is rearing its ugly head in the U.S. after a six-year hiatus, and will prompt the Federal Reserve to cut rates to 2.50%, according to Goldman Sachs & Co. (GS), the world's most profitable security firm.

Goldman's U.S. economic team said in a research note Wednesday that they switched to an "outright recession call" as the housing slump and credit market turmoil spills over into the broader economy, with consumer spending taking a hit. The economists made the call following reports over the past week that showed a spike in the jobless rate, and a tumble in home sales and manufacturing activity.

"The latest data suggest that recession has now arrived, or will very shortly, " said Ed McKeley, senior U.S. economist at Goldman Sachs in New York, in a note to clients.

The recession - which is typically defined as two quarters of contraction in economic activity - is likely to last two to three quarters, Goldman said. The economists expect the Federal Reserve to respond to that by cutting interest rates aggressively, bringing the overnight target rate for borrowing between banks to 2.5% by late 2008 from its current 4.25%, according to Goldman.

Consumer spending will nosedive as slumping housing markets have made it hard for people to tap into their home equity and as banks have tightened credit lending, Goldman said. The contracting economy is likely to push the unemployment rate to about 6.25% by late 2008 from 5% in December, leading to a significant setback in corporate earnings.

One silver lining is that the recession is likely to be relatively mild by historical standards, with a cumulative contraction in real gross domestic product of only about 0.5%. And the economy will eventually walk out of the recession and gradually recover in the course of 2009, Goldman's economists said.

The forces to keep the economy from deeper misery are a helping Fed, which will set aside inflation fears to deal with the economy's weakness, as well as Congress and the Bush Administration, who may agree on a temporary tax break to take effect later this year, Goldman said.

Also aiding the economy is a weakening dollar that has helped boost exports and shrink the trade deficits.

The yield on the 10-year Treasury note is expected to fall to 3.5% by late summer following rates reductions from the Fed. The 10-year benchmark yielded 3.79% Wednesday.

Goldman's Global Alpha May End 2007 Down $6 Billion

Goldman Sachs Group Inc.'s Global Alpha hedge fund may lose about $6 billion in assets this year, a 60 percent decline, because of trades that went awry and client withdrawals, according to two investors.

Global Alpha, which entered 2007 with more than $10 billion, lost 37 percent on investments through Nov. 14, most of it in August, said the Goldman clients, who asked not to be identified because the fund's performance is private. The New York-based company has about $2 billion in fourth-quarter redemption notices, on top of withdrawals through the year.

Goldman, the world's most profitable securities firm, said last month it won't shut down Global Alpha, a quantitative fund whose managers, Mark Carhart and Raymond Iwanowski, use computer models to select trades. The fund generated $700 million in fees in 2006, after returning almost 40 percent the previous year.

Goldman as a firm would like not to have the reputation of shutting things down, said Geoffrey Bobroff, an independent investment consultant in East Greenwich, Rhode Island. Smaller isn't necessarily bad.

Christopher Williams, a Goldman spokesman, declined to comment.

Global Alpha fell 22.5 percent in August, hurt by wrong-way stock and currency bets. Other Goldman quant funds lost money that month, including the $7.5 billion Global Equity Opportunities, which declined 23 percent.

Goldman pumped $2 billion of its own money into Global Equity in the middle of the month and raised an additional $1 billion from investors such as billionaires Eli Broad and Maurice Hank Greenberg, former chairman of American International Group Inc.

Source - Bloomberg