By A Worrachate and C Young, Bloomberg
Sydney: The dollar was little changed versus the yen and the UK pound before a US report that may show a decline in consumer confidence, suggesting weakness in the housing market is weighing on the economy.
The US currency fell in New York yesterday after a government report showed new home sales unexpectedly dropped to the lowest in almost seven years, and traders increased bets the Federal Reserve will cut interest rates. The euro may decline before an industry report today that’s expected to show business confidence in Germany fell for a third straight month in March.
“The market was very disappointed by the new home sales data yesterday and it will watch the consumer confidence today very closely,” said Neil Jones, head of hedge fund sales at Mizuho Capital Markets. “We expect the Ifo survey is likely to show some resilience in business confidence in Germany, but we are aware of some potential disappointment if the number comes in weaker than expected.”
The dollar was at $1.3331 per euro at 8:15 a.m. in London from $1.3330 in late New York yesterday, when it slid by 0.4%. The US currency traded at 117.96 yen from 118.14.
Chicago Fed President Michael Moskow said today the Fed’s next monetary policy actions depend on incoming data, dropping reference in speeches since August to “additional firming” in interest rates.
The dollar headed for a 1 % decline against the euro this quarter as a housing market slump erodes consumer confidence. The Conference Board’s index, due at 10 a.m. in New York, may fall to 108.5 from 112.5, halting a four-month gain, according to a Bloomberg News survey of economists.
“The consumer confidence number will be reason enough not to be too enthused about the dollar,” said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia, the nation’s sixth-biggest bank. “We’ve not yet seen the bottom for the dollar,” which will drop to $1.34 per euro this week and $1.35 in a month, he said.
Futures suggest the chance of the Fed cutting its target lending rate to 5 % from 5.25 % at its Aug. 6-7 meeting is 67 %. The likelihood reached 72 % yesterday after the new homes sales report.
Kokusai Global Sovereign Open, the world’s second-biggest bond fund, increased its holdings of yen debt for the first time in almost a year, to 8 % from 7 %, as the extra yield it earns in the US shrank.
Masataka Horii, one of the Tokyo-based managers, said the company bought on signs the Fed will cut rates and as the yield premium for investing in 10-year US government notes over Japan’s narrowed. It was 2.95 percentage points today from 3.22 percentage points by 25 January.
Any decline in the euro may be tempered by speculation central bank officials this week will signal higher interest rates after upbeat comments on Europe’s economy from finance ministers of the 13-nation region yesterday.
“Growth is robust in the whole euro area,” Luxembourg Finance Minister Jean-Claude Juncker told reporters in Brussels. European Central Bank executive board member Jose Manuel Gonzalez-Paramo speaks in Madrid and president Jean-Claude Trichet and council member Miguel Fernandez Ordonez speak in Valencia tomorrow.
“There is no doubt among most traders that the ECB will hike rates again,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. “The bias for the euro is to appreciate” to $1.3350 and 157.80 yen today, he said.
Yen Carry Trade
Interest-rate futures show investors expect the ECB to raise the benchmark a quarter point to 4 %.
The yield on the three-month Euribor futures contract for September was 4.145 % yesterday, from 4.135 % a week earlier. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB’s benchmark rate since 1999.
Yen gains may be limited by speculation investors will borrow in Japan and sell the currency to invest in countries such as Australia, where the benchmark lending rate is 5.75 percentage points higher. BOJ Governor Toshihiko Fukui told lawmakers in parliament today the 0.5 % rate will remain low for the time being.
So-called carry trades are more attractive as fluctuations in currencies diminish, reducing the risk of foreign exchange losses. Volatility on one-month Australian dollar-yen options fell to 9.5 % today from 10.35 % yesterday.
“High-yielding currencies such as the Australian and New Zealand dollars and the Norwegian krone are luring investors, as they feel comfortable about putting on carry trades,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The trend is for the yen to weaken” to 118.50 against the dollar and 158.00 per euro today, he said.