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Friday November 9, 2007 - 12:31:31 GMT
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FOREX NEWS-Dollar dives as credit woes fuel rate cut prospects

Fri Nov 9, 2007 7:21am EST

(Recasts, changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, Nov 9 (Reuters) - The dollar slumped to 1-1/2 year lows against the yen, as investors sold the U.S. currency in favour of safe haven assets in the wake of concerns about the health of the financial sector and expectations of U.S. rate cuts.

The embattled dollar also plunged to new record lows versus the euro and a basket of currencies, on Friday as fears grew that more U.S. financial firms will be hit by credit market turmoil, while high yielding carry currencies fell.

The Australian and New Zealand dollars fell by more than a percent versus the greenback as investors, rattled by concerns about the health of the financial sector, exited carry trades where they borrow low yielding currencies like the yen to fund purchases of higher yielding assets.

Such worries came to the fore again after ratings agency Standard & Poor's said on Thursday that a collateralised debt obligation (CDO) managed by State Street Global Advisors may have started selling assets. [ID:nT14586].

A downbeat economic forecast from Federal Reserve Chairman Ben Bernanke on Thursday cemented market views that the Fed will cut rates more, further eroding the greenback's yield appeal.

This contrasts with continued hawkish rhetoric from the European Central Bank -- despite its warnings on "brutal" FX moves -- and the Bank of England's decision not to cut yet.

"There is a flight to quality as risk aversion has come back, with write-downs in the U.S. financial sector coming in more than expected," said Antje Praefcke, currency strategist at Commerzbank Corporates and Markets in Frankfurt.

"The market is looking for reasons to sell the dollar, which there are, as Fed cut speculation firms."

By 1127 GMT, the dollar was down 1.2 percent versus the yen at 111.34 yen <JPY=>, having touched 110.99, its lowest level since mid-2006.

The euro hit a peak of $1.4752, its highest level since inception according to Reuters data, before trimming gains to stand at $1.4672 <EUR=>.

It is now up over 11 percent since the start of the year and has breached levels equivalent to record highs in the Deutschemark/dollar exchange rate.

Sterling retreated from earlier 26-year high at $2.1161 <GBP=> after shares in Barclays fell as much as 9 percent on market talk of big credit market losses at Britain's third largest bank [ID:nL09723643].

The dollar extended its overnight slide against the Swiss franc, falling to 1.1190 francs <CHF=>, the lowest since 1995.

Reflecting rise in risk aversion, the euro was on track for its biggest one-week percentage drop versus the franc since September 2001 <EURCHF=>.

European equity markets fell around 1 percent (.FTEU3: Quote, Profile, Research), while implied one-week volatility in euro/dollar spiked up to 10.35 percent, its highest in 2-1/2 years.


The dollar index (.DXY: Quote, Profile, Research) which measures its value against a basket of six major currencies, fell as low as 74.978, its lowest ever level.

Bernanke told U.S. lawmakers that the Fed expected economic growth to slow noticeably in the fourth quarter of 2007 and the first half of 2008, citing credit industry turmoil and the likelihood that the housing sector slump deepens.

That contrasted with ECB President Jean-Claude Trichet's vow on Thursday to keep a grip on inflation, leaving a chance that the ECB may raise interest rates further from current 4 percent.

He also said that "brutal" currency moves are not welcome.

Friday also features the release of U.S. September trade data as well as the Reuters/Univeristy of Michigan consumer confidence index for November.

"With Bernanke's testimony coming out officially with the whiff of stagflation - today's focus on University of Michigan index and import prices, we expect further pressure on the dollar as Asian Central Banks are unlikely to be able to react swiftly enough," Dresdner Kleinwort said in a research note.

During Thursday's New York trading, U.S. short-term interest rate futures showed an 94 percent implied chance the Fed will trim benchmark rates by a quarter point in December, up from 70 percent late on Wednesday.

At one point, the implied probability of a cut reached 100 percent after Bernanke's testimony. (writing by Simon Falush; Editing by Ron Askew)

© Reuters 2006. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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