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Dollar Falls to Three-Week Low on Concern U.S. Economy Stalled
Friday, February 22, 2008

Feb. 22 (Bloomberg) -- The dollar fell to a three-week low against the euro on speculation the Federal Reserve will cut borrowing costs to stave off a recession while European policy makers keep rates on hold.

The U.S. currency declined against 14 of its 16 most-active counterparts as traders bet the Fed will lower its target rate a half percentage point next month. The Australian and New Zealand dollars climbed and the Brazilian real advanced to the highest in almost nine years as those nations' higher-yielding assets attracted investors.

``The U.S. is in a material slowdown and it feels like a recession,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``Dollar weakness has gained momentum this week.''

The dollar fell to $1.4838 per euro at 8:37 a.m. in New York, from $1.4814 yesterday, and touched the weakest since Feb. 1. The dollar declined to 107.04 yen from 107.40. The euro fell to 158.91 yen, from 159.10. The dollar is headed for a second straight weekly decline versus the euro.

The euro extended its advance against the dollar after a report showed growth in European service industries accelerated more than forecast in February.

The Brazilian real reached 1.7004 per dollar, the strongest level since May 1999. The country's benchmark rate is 11.25 percent.

Australia, New Zealand

The Australian and New Zealand dollars headed for a second straight weekly gain on speculation the interest-rate advantage of the two nations over the U.S. will widen, bolstering demand for their higher-yielding assets. The Australian dollar rose 1.5 percent to 92.25 U.S. cents and the New Zealand dollar gained 1.9 percent to 80.55 U.S. cents.

Futures on the Chicago Board of Trade show the chances of a half-point cut in the Fed's target rate to 2.5 percent on March 18 have risen to 92 percent, from 66 percent a week ago. Traders increased bets Australia's central bank will raise borrowing costs a quarter-point to 7.25 percent next month. New Zealand's key rate is a record high 8.25 percent.

The dollar fell the most against the euro in four weeks yesterday after a report showed manufacturing in the Philadelphia region, seen as a proxy for other areas in the U.S., contracted the most last month since 2001.

Fed Forecasts

The Fed has lowered its main rate to 3 percent from 5.25 percent since Sept. 18 to avert the first recession since 2001. The cuts have eroded the appeal of U.S. assets while accelerating inflation in Europe prompted investors to reduce expectations that the European Central Bank will cut interest rates.

At 3.34 percent, the two-year German bund yielded 1.33 percentage points, or 133 basis points, more than similar- maturity Treasuries. The yield difference reached 139 basis points on Jan. 22, the most since 2002, as the Fed cut rates by 2.25 percentage points since September.

Fed officials cut their 2008 U.S. growth forecasts on Feb. 20 and said in the minutes of their last meeting rates should be held down ``for a time.'' They now expect the economy to expand by 1.3 percent to 2 percent, compared with the 1.8 percent to 2.5 percent range predicted in October.

Some members noted ``when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.''

``If you take the view that the U.S. is going to have a strong V-shaped recovery, then the euro at $1.48 starts to look pretty exposed,'' said Gerry Celaya, chief strategist at Redtower Ltd. in Aberdeen, Scotland, in a television interview. ``That's the view we're taking, that the Fed will have to raise rates before 2009.''

The dollar may rebound to $1.40 per euro by year-end, according to the median forecast of 39 analysts surveyed by Bloomberg.

   
 
 
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