Dollar Drops Versus Euro, Yen as Bush Nominates Bernanke ...



Yen Strengthens Versus Dollar on Bets Investors Avoiding Risk

By Min Zeng and Bo Nielsen

March 20 (Bloomberg) -- The yen rose against the dollar and the euro, erasing earlier losses, on speculation mortgage delinquencies among borrowers with poor credit histories are leading investors to reduce holdings in riskier assets.

The dollar's decline accelerated after Reuters reported Chinese central bank Governor Zhou Xiaochuan, in an interview with Emerging Markets magazine, said China would stop stockpiling foreign exchange reserves. The yen had dropped earlier after the Bank of Japan kept its key interest rate at 0.5 percent, the lowest among major economies. “There is still a bit of nervousness in the market,” said Christian Dupont, a senior currency trader in Montreal at Societe Generale SA. “I don't think the unwinding of the carry trade is over,” referring to the practice of selling the yen to buy higher-yielding assets outside Japan.

The yen rose 0.3 percent to 117.22 per dollar at 1:28 p.m. in New York, rebounding from an intraday low of 118.02. The Japanese currency advanced 0.2 percent to 155.96 per euro.

The dollar also weakened after it failed to sustain its gain above 118 yen today, adding momentum to selling, said traders including Grant Wilson, a currency trader in Pittsburgh at Mellon Financial Corp., and Firas Askari, head currency trader in Toronto at BMO Capital Markets.

People who were looking for a higher dollar at 118 JPY/USD “threw in the towel and started buying yen, and that sparked” the selling in the dollar, Wilson said.

`Already Large Enough'

China's foreign exchange reserve is USD 1.07 trillion, the largest in the world. “Many people say that foreign exchange reserves in China” are already large enough, Zhou told Emerging Markets magazine, according to Reuters. “We do not intend to go further and accumulate reserves,” he said.

There could be confusion over Zhou's comments, according to currency strategists including Camilla Sutton at Scotia Capital Inc. in Toronto.

“The mere idea of China no longer accumulating reserves is preposterous” unless China's yuan is allowed to flow freely, Sutton said. “We do not think this is about to occur.”

China is the second-largest holder of U.S. Treasury securities, with USD 353.6 billion, trailing Japan, which has raised USD 648.8 billion. As China diversifies away from dollar assets, it may push up yields on U.S. Treasuries and raise business and consumer costs.

Fed Rate Outlook

The dollar's losses may be limited before the Federal Reserve's two-day rate-setting meeting, which ends tomorrow. The policy-setting Federal Open Market Committee will probably keep rates at 5.25 percent, according to all of the 93 economists surveyed by Bloomberg News.

Investors are waiting to see how the Fed will address the outlook for growth and inflation amid concern weakness in the subprime mortgage sector may drag down the economy.

“The market may be surprised by the dovish nature of comments on growth,” said Mitul Kotecha, head of currency strategy in London at Calyon. “We could see a softer dollar on the back of that.” The U.S. currency may fall to 1.37 USD/EUR by the end of the second quarter, he said.

The U.S. currency dropped 1.6 percent last week against the euro, the most in almost four months, on concern weakness in the subprime mortgage market may drag down the U.S. economy. The dollar today was little changed against the euro, falling 0.02 percent to 1.3304 USD/EUR.

Housing Starts Rise

Builders broke ground on new homes at an annual rate of 1.525 million last month, up 9 percent from a 1.399 million rate the prior month, which was the lowest pace since August 1997, the Commerce Department said today in Washington. Building permits fell 2.5 percent to a 1.532 million pace.

The British pound rallied against the dollar and the euro after U.K. consumer prices rose 2.8 percent from a year earlier, the second-fastest pace in a decade, adding to speculation the Bank of England will keep raising borrowing costs from 5.25 percent to stem inflation.

“The BOE may have to do a lot more to keep inflation under control,” said Paul Chertkow, head of global currency research in London at Bank of Tokyo Mitsubishi UFJ Ltd. “This should cause the pound to appreciate.”

Canada's dollar rose the most against its U.S. counterpart since June and also advanced versus the euro, the pound and the yen after a government report showed inflation for items excluding food and energy unexpectedly accelerated last month, reducing the likelihood of a cut in borrowing costs by the Bank of Canada from 4.25 percent.

Last Updated: March 20, 2007 13:30 EDT

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