The dollar sank to a record low against the euro as U.S. home prices and consumer confidence tumbled, bolstering bets the Federal Reserve will keep reducing interest rates.
The U.S. currency declined to the weakest level since the euro began trading in 1999, and slumped against all of the most- active currencies as Fed Vice Chairman Donald Kohn said turmoil in credit markets and the possibility of slower economic growth pose a “greater threat” than inflation.
Kohn’s comment “confirmed the Fed will keep cutting interest rates,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader. “That brought more downward pressure on the dollar.” The bank forecasts another 3.5 percent dollar drop in the next three months.
The dollar weakened to $1.4968 per euro at 4:02 p.m. in New York, from $1.4830 yesterday, falling past the previous historic low of $1.4967, set Nov. 23. The U.S. currency dropped to 107.27 yen from 108.07.
The U.S. currency has lost about a quarter of its value in the past five years, according to the Fed’s U.S. Trade Weighted Major Currency Dollar index, which comprises seven currencies of U.S. trading partners. The weaker dollar has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation’s trade deficit last year for the first time since 2001.
The dollar may fall at least another 10 percent on a trade- weighted basis, said Kenneth Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts, and formerly chief economist at the International Monetary Fund.
“We’re seeing demand shifting away from the U.S. to Europe and Asia,” he said.
New Zealand’s dollar rose to the strongest since it began trading freely in 1985, on bets the central bank will lift rates. The currency rose as high as 81.58 U.S. cents as a Reserve Bank of New Zealand survey showed inflation is forecast to be at the top of the bank’s preferred band in two years.
South Africa’s rand gained against all of the 16 most- active currencies after a government report showed economic growth unexpectedly accelerated to the fastest pace in a year.
The U.S. currency fell to the lowest levels of the day after Kohn, speaking in North Carolina, said “the adverse dynamics of the financial markets and the economy have presented the greater threat” to the U.S. economy than inflation.
“Kohn painted a very bleak assessment of the U.S. economy,” said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million funds under management. “What he indicated is that the Fed will keep providing lower interest rates regardless of inflation. It’s outright dollar- negative.”
Futures on the Chicago Board of Trade show traders see a 92 percent chance the U.S. central bank will reduce the 3 percent target rate for overnight lending between banks by 50 basis points at their March 18 meeting, and a 8 percent likelihood of a quarter-point cut. The Fed has already cut rates five times since Sept. 18.
The dollar’s decline accelerated after it weakened beyond about $1.4910 per euro, a level where traders had pre-set orders to sell the U.S. currency, causing a “capitulation of those hoping the dollar would rebound,” Dolan said.
The dollar will rebound to $1.48 per euro by the end of March and to $1.40 by year-end, according to the median forecast in a Bloomberg News survey of 41 analysts.
The euro rose to 160.58 yen from 160.27, reaching a six- week high, as the Munich-based Ifo institute said its business climate index rose to 104.1 in February, from 103.4 in January. The median estimate in a Bloomberg survey was for a drop to 102.9. After the report, traders pared bets the European Central Bank will lower its target from the current 4 percent level.
The German confidence report “underscores the euro zone is holding up reasonably well in face of a U.S. slowdown,” said Stephen Malyon, a currency strategist at Scotia Capital Inc. in Toronto.
The odds of the ECB lowering borrowing costs fell, with the implied yield on the Euribor futures contract for June rising 3 basis points to 4.15 percent. The yield averaged 0.18 percentage point more than the ECB’s benchmark from 1999 until August. A basis point is 0.01 percentage point.
At 3.37 percent, the two-year German government bund yielded 133 basis points more than similar-maturity U.S. Treasury notes. The yield difference reached 139 basis points on Jan. 22, the most since 2002.
South Africa’s rand climbed 1.4 percent to 7.5637 per dollar, the biggest advance since Feb. 1, as the continent’s biggest economy expanded an annualized 5.3 percent in the fourth quarter, from 4.8 percent in the previous three months. Growth was expected to slow to 4.4 percent, the median forecast in a Bloomberg News survey.
The U.S. currency began to decline earlier as a government report showed producer prices rose 1 percent in January, after a 0.3 percent decline the prior month, and more than double the median forecast in a Bloomberg survey.
“Higher inflation coupled with slower growth is not a recipe for a stronger currency,” said John McCarthy, a director of currency trading at ING Financial Markets LLC in New York.
The S&P/Case-Shiller index of home prices in 20 U.S. metropolitan areas fell 9.1 percent in December from a year earlier, the most on record. The Conference Board’s index of consumer confidence fell to 75 from 87.3 in January.