Are you sure?

Dollar declines on speculation Fed will cut rates, ECB to raise

The dollar declined to its weakest in three weeks against the euro on speculation the Federal Reserve will reduce interest rates this year while European Central Bank policy makers increase their benchmark.

The dollar slid against all 16 of the most actively traded currencies before a report tomorrow that may show manufacturing growth stagnated in the world's largest economy. The Fed has held borrowing costs steady since June after a two-year campaign of raising them. ECB council member Erkki Liikanen suggested in an interview broadcast today that rates will rise in Europe. „It gives further credence to the idea the we will see further interest rate hikes from the ECB,” said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto. „The momentum we've seen late last year in the euro is starting to carry into 2007.” The US currency fell to $1.3274 versus the euro by 10:13 a.m. in New York, from $1.3201 yesterday, its biggest daily drop since December 19. It earlier touched $1.3297, the weakest since December 8. The US currency fell to ¥118.83 from 119.05. The dollar fell 10.2% against the euro last year.

The Institute for Supply Management tomorrow will probably say US manufacturing didn't expand last month, after contracting for the first time since April 2003. The survey may show a reading of 50, the dividing line between expansion and contraction, for December, compared with 49.5 in November, according to a Bloomberg News survey of economists. The dollar fell the most against the South African rand, which rose 1.8%. The Singapore dollar strengthened 0.2% to its strongest since October 1997. The euro rose for the fourth straight day to a high against the yen, trading at ¥157.7 from 157.15 yesterday, after touching ¥157.87.

„The Fed will cut interest rates and the US rate advantage will erode, weighing on the dollar,” said Harvinder Kalirai, head of research in Sydney at State Street Corp. The Fed has kept its overnight lending rate unchanged at 5.25% at its past four meetings, ending a two-year cycle of borrowing-cost increases. Sixteen of 22 so-called primary dealers, including Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and UBS Securities LLC who trade directly with the Fed expect the central bank to reduce its overnight lending rate between banks by the end of the year. US economic expansion slowed to 2% in the Q3, and 2.6% in the Q2. ECB Policy makers lifted their benchmark refinancing rate by a quarter percentage point to 3.5% on December 7, the sixth rate increase since December 2005.

The yield premium investors earn on benchmark two-year US bonds over similar-maturity German bunds narrowed to 0.885 percentage points today from 0.905 percentage points on December 29. Employers in the US added 113,000 workers to their payrolls in December, ending a quarter in which job creation was the slowest in three years, according to the median estimate of economists surveyed by Bloomberg before the January 5 report. The economy created 132,000 jobs the previous month. The euro extended its gains today after the ECB's Liikanen said in an interview with broadcaster YLE that wage demands in Germany may spark inflation. „The ECB look like they'll keep pushing up rates,” said Matthew Jones, a senior currency dealer at Custom House Global Foreign Exchange in Sydney. Growth in the euro region was 2.7% in the Q3 and 2.8% in the second. The Eurostat in Luxembourg releases the final estimate of Q3 GDP next week. The jobless rate in Germany fell to its lowest in more than four years in December, a government report tomorrow may show, according to a Bloomberg survey of economists.

The European currency last year gained the most against the yen since its debut in 1999 as the ECB raised rates five times, compared with a single increase by the Bank of Japan. The yen fell 11.2% against the euro and 1.1% against the dollar in 2006. Europe's single currency rose as high as ¥157.85, and traded at ¥157.75. The euro remained stronger after a report showed European manufacturing growth in December was little changed from the previous month. „The headline outcome highlights a euro zone manufacturing sector that is still expanding at a robust pace,” said Jodie Saul, a European economist at CIBC World Markets in London, in an e-mailed note to clients. „There's nothing in the breakdown to alter the near-term monetary policy outlook.” Royal Bank of Scotland Group Plc said its manufacturing index fell to 56.5, from 56.6 in November. A reading above 50 indicates growth. Economists forecast the gauge, compiled by NTC Economics Ltd. from a survey of 3,000 purchasing managers, would rise to 56.8, the median of 25 forecasts in Bloomberg survey showed. (Bloomberg)