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Dollar falls to three-month low on concern over slowing economy

The dollar fell to the lowest level this year against the euro and dropped versus the yen on concern a slowing economy is reducing the appeal of US investments.

The US currency headed for its biggest weekly loss against the euro since early December on bets more homebuyers with poor credit histories will fall behind on mortgages. A government report showed consumer prices rose last month more than economists forecast, reducing bets the Federal Reserve will cut borrowing costs. US stocks fell, highlighting risk aversion. „Inflation is stubbornly above the Fed's comfort zone, but growth is well below expectations,” said Tim Mazanec, senior currency strategist in Boston at Investors Bank & Trust Co. „That's not a strong-dollar scenario.” The dollar declined 0.59% to $1.3315 per euro and dropped 0.69% to ¥116.75at 4:27 p.m. in New York. The US currency earlier fell to $1.3339 per euro, the lowest level since December 8.

US economic growth may slow to a 2.4% pace in the Q1 from 5.6% a year ago, according to the median forecast of 75 economists surveyed by Bloomberg News. The Commerce Department will release its report on gross domestic product on March 29. The odds the Fed will cut its overnight lending rate between banks to 5% from 5.25% by its June meeting fell to 30% after the release of the report on consumer prices from 38% yesterday, US interest-rate futures contracts for July show.

Investors over the past few weeks have sold the European currency against the yen to pay back loans for investments in riskier assets, wrote Derek Halpenny, senior currency strategist in London at Bank of Tokyo-Mitsubishi, in a research note yesterday. The euro is now poised to extend its gains against the dollar, according to Halpenny. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen versus the dollar compared with those on a gain - so-called net shorts –narrowed to 52.853 on March 13, compared with 62,886 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show. The net shorts were the lowest since December 11.

The dollar remained lower after a government report showed US consumer prices advanced more than expected in February, reducing the likelihood the Federal Reserve will cut borrowing costs by midyear. The consumer price index increased 0.4% last month after a 0.2% gain in January, the Labor Department said. The median forecast of 75 economists surveyed by Bloomberg News was for a 0.3% gain in February. „The CPI report put a floor under the dollar,” said Max Tessier, vice president of currency management in Montreal at CIBC Global Asset Management, which manages $2 billion in currency assets. „The risk of inflation is still there, and the Fed won't cut interest rates any time soon.” Industrial production in the US rose last month the most since November 2005, as manufacturing rebounded and the return of cold weather prompted a surge in utility use, the Federal Reserve reported.

The Reuters/University of Michigan's preliminary index of sentiment showed confidence among US consumers fell more than economists forecast this month. „The US numbers came out ambiguous enough to settle the market down on the theme of dollar weakness,” said John McCarthy, director of currency trading in New York at ING Financial Markets LLC. „The dollar will remain under pressure.” Traders who use charts to predict the movement of currencies said the dollar triggered selling as it fell below $1.325 per euro, the lower level of a four-month range. „The dollar weakened overnight after we breached important technical levels,” said Christian Dupont, a senior currency trader in Montreal at Societe Generale SA. „The concerns about the supreme market weigh on the dollar.” The yen strengthened against all but two of the most active currencies tracked by Bloomberg on speculation investors are reluctant to buy riskier assets funded by loans in the Japanese currency, a practice known as the carry trade. It rose 0.09% to 155.49 against the euro.

The Standard & Poor's 500 Index dropped 0.38%, and the Dow Jones Industrial Average fell 0.41%, capping two days of gains. European and Asian stocks fell for the week. The implied volatility on the one-month dollar-yen option, a gauge of the risk of holding the currency pair, rose 93 basis points to 10.025 percentage points. „This is not the best environment for the carry trade,” Tessier said. „Global growth is slowing, and volatility is picking up.” (Bloomberg)