Dollar's dip ups chances of interest rate cut

The dollar fell against the euro, extending last year's 10 percent decline, on concern evidence of a US manufacturing slowdown will give the Federal Reserve more reason to lower interest rates.

The dollar was near the lowest in three weeks versus the yen on speculation the Institute for Supply Management will say US manufacturing almost stalled in December.

The US currency weakened against 13 of the 16 most-actively traded currencies yesterday as traders bet the central bank will reduce borrowing costs at least twice more in 2008.

"The dollar's on the defensive," said Robert Minikin, a currency strategist in London at Standard Chartered Plc. "We expect two interest-rate reductions of a quarter each by the end of March, with risks tilted to the downside."

The US currency fell to $1.4661 per euro at 9:20 am in London from $1.4592 late in New York on Tuesday. It dropped to $1.4967 on November 23, the lowest since the euro's introduction in 1999. It was little changed at 111.65 yen from 111.64 yen.

Australia's dollar advanced for a second day against the US currency after a report showed the nation's industrial production grew at the fastest pace in more than five years last month. The Australian dollar was at 88.10 US cents versus 87.61 yesterday.

The dollar slid the most against the Brazilian real, falling 1 percent to 1.78 real. It declined 0.5 percent against the Swiss franc, which traded at 1.1272, while Canada's dollar was at 99.27 Canadian cents per US dollar from 99.26.

Rate cuts

The dollar slid against the euro in 2007 as the Fed lowered its benchmark rate by 1 percentage point to 4.25 percent. The euro gained 10.6 percent last year as the European Central Bank raised its main refinancing rate twice to 4 percent, the highest in six years.

The chance the Fed will cut its target rate for overnight lending between banks by a quarter-point to 4 percent at its January 30 meeting rose to 92 percent from 76 percent a week ago, according to futures contracts on the Chicago Board of Trade. The odds of a reduction to 3.75 percent at its March 18 meeting are 61 percent.

The ISM's factory index fell to 50.5 in December from 50.8 the previous month, the Tempe, Arizona-based group may report, according to the median estimate of economists surveyed by Bloomberg News. A reading of 50 is the dividing line between expansion and contraction.

The dollar may fall to $1.4750 this week, according to Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd in Sydney.

Agencies

(China Daily 01/03/2008 page17)