The dollar dropped the most in a week against the euro as the United Arab Emirates said it will convert some of its reserves of U.S. assets into the European currency.
The dollar also had its biggest decline versus the yen this month before a U.S. report that may show consumer confidence fell for a third straight month, fueling bets the Federal Reserve will lower interest rates next year. The U.S. currency has slipped 9.9 percent versus the euro this year, its first slide since 2004.
“The U.A.E.’s decision to relocate its reserves is part of a theme that means that U.S. dollar holdings in global currency reserves are decreasing,” said Hans Guenter Redeker, head of currency strategy in London at BNP Paribas SA. “The dollar is going to lose support as we see Fed rate cuts next year.”
The dollar fell to 118.63 yen at 7:17 a.m. in New York, from 119.15 late yesterday. The currency slid to $1.3158 versus the euro, from $1.3098. The euro traded at 156.09 yen, from 156.04, after touching a record 156.43 on Dec. 21. The dollar has risen 0.8 percent against the Japanese currency this year.
The U.A.E. will switch 8 percent of its reserves from dollars into euros before September, Sultan Bin Nasser al-Suwaidi said in a Dec. 24 interview in Abu Dhabi. The U.A.E. has started “in a limited way” to sell its dollar reserves, he said.
The Gulf state is among oil exporters including Iran, Venezuela and Indonesia that are looking to shift their currency reserves into euros or price their oil products in the 12-nation currency.
The U.S. Conference Board’s index of sentiment due tomorrow will probably drop to 102 this month from 102.9 in November, according to the median forecast of 48 economists surveyed by Bloomberg News. MasterCard Advisors also said holiday retail sales this year grew at a slower pace this year than in 2005.
“The data are likely to add to an economic slowdown scenario that may prompt a rate cut in the first quarter,” said Masashi Kurabe, a currency manager in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan’s largest lender by assets. “The bias is to sell the dollar.”
The Fed has left borrowing costs at 5.25 percent for the past four policy meetings, after a two-year cycle of rate increases. The European Central Bank has raised rates six times in a year, to 3.5 percent. The Bank of Japan lifted its benchmark in July for the first time in almost six years, to 0.25 percent.
Interest-rate futures show traders see a 28 percent chance the Fed will lower its overnight target lending rate between banks by a quarter point to 5 percent in March, up from a 17 percent likelihood a week ago.
The yen’s gains accelerated against the dollar after a Jiji Press report suggested the BOJ will push rates higher at its January meeting because of better-than-expected data yesterday.
Japan’s government bonds fell the most in three weeks after the Jiji article. Reports yesterday showed an unexpected fall in the unemployment rate and a smaller-than-expected decline in household spending.
“The Jiji report is spurring yen buying,” said Nobuo Ibaraki, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan’s largest brokerage. “Expectations for an interest-rate hike had receded. So the Jiji report will have a big impact on the yen.” Japan’s currency may strengthen to 118 per dollar today, he said.
Jiji correctly predicted 10 days before the BOJ’s meeting last week that policy makers would keep rates unchanged. The central bank will consider lifting the benchmark to 0.5 percent from 0.25 percent when it announces its next decision on Jan. 18, Jiji Press reported, citing unnamed sources.
Governor Toshihiko Fukui told business leaders on Dec. 25 that the central bank will adjust policy if prices and the economy perform in line with forecasts.
Gains in the yen may be limited after a government report showed retail sales rose less than expected last month.
The currency is set for a second straight annual decline as interest rates in Japan, which are the lowest among major economies, prompt investors to seek higher returns offshore.
Traders have still cut bets that the Japanese central bank will raise borrowing costs in January. The household spending report showed an 11th month of declines and gains in consumer prices failed to beat forecasts.
“It’s hard to find a reason to buy the yen,” said Stephen Halmarick, co-head of economic and market analysis at Citigroup Australia in Sydney. “This is yet another set of disappointing numbers out of Japan.”
The dollar may extend declines after MasterCard Advisors said retail sales in the holiday season rose 3 percent, a slower pace than last year’s 5.2 percent increase, as a cooling housing market and higher energy costs cut into spending.
The National Association of Manufacturers in the U.S. predicts slower economic growth will prompt the Fed to lower rates by a half-percentage point by the middle of 2007, the Wall Street Journal reported yesterday on its Web site, citing the Associated Press.