More credulous marveling at the growing disparity between oil and gold

Section:

By Joshua Krongold
and Mark Tannenbaum
Bloomberg News Service
Friday, September 2, 2005

http://www.bloomberg.com/apps/news?
pid=10000101&sid=arM_6CCXhSLE&refer=japan

The dollar headed for its largest weekly decline since November
against the euro on speculation the Federal Reserve will pause in
its campaign of interest rate increases.

Destruction from Hurricane Katrina, surging oil prices and signs of
slowing economic growth led traders to bet the Fed will raise its
benchmark rate only one more time this year. The U.S. currency's 8.1
percent advance against the euro this year was partly driven by a
widening rate advantage over Europe.

"If you look at interest rate differentials versus a lot of the key
economies, they're no longer moving in the dollar's favor," said
Daniel Katzive, a currency strategist in Stamford, Connecticut, at
UBS Securities LLC. "I don't think the dollar will have an easy time
recovering."

Against the euro, the dollar fell to $1.2540 at 11:15 a.m. in New
York from late yesterday, according to electronic currency dealing
system EBS. It earlier touched $1.2589 per euro, the lowest since
May. The dollar was little changed at 109.78 yen.

UBS yesterday lowered its forecast for the dollar. The firm now
expects the U.S. currency to decline to $1.27 per euro in one month
and $1.29 in three months, compared with its previous projection of
$1.23 and $1.25. The firm now predicts the dollar will drop to 108
yen in a month, down from 110.

The U.S. currency is 2 percent lower versus the euro so far this
week, the most since the week ended Nov. 26, and is 0.2 percent
lower against the yen. It has declined eight of the past nine weeks
against the euro, altogether about 5 percent.

The dollar pared some losses after the U.S. Labor Department said
employers added 169,000 jobs in August and the unemployment rate
fell to 4.9 percent from 5 percent. July's job growth was revised
higher to 242,000 from 207,000.

"Had it not been for Hurricane Katrina, the drop in the unemployment
rate below 5 percent is something the Fed would have focused on,"
said Robert Sinche, head of global currency strategy at Bank of
America Corp. in New York. "An August number doesn't tell us all
that much, though. There's now a dichotomy between pre- and post-
Katrina economic numbers."

Lehman Brothers Inc. and Bear Stearns & Co. economists reduced their
forecasts for third-quarter economic growth, citing damage from
Katrina. Lehman cut its prediction to 3.8 percent from 4.1 percent
and Bear Stearns lowered its forecast to 3.5 percent from 4.5
percent.

Fed policy makers are likely to lift their target rate for overnight
loans between banks to 3.75 percent at their Sept. 20 meeting and
then stop, interest-rate futures show. The European Central Bank's
benchmark rate is 2 percent.

The yield on the September federal fund futures contract was 3.57
percent today, showing traders see less than a 100 percent chance
the Fed's key rate will be 3.75 percent at this month's meeting.
Traders earlier this week fully expected an increase, and another
before year-end to 4 percent.

"There's really not too many reason to be holding dollars," said
John Cholakis, a currency trader in New York at Natexis Banques
Populaires. "Some of the luster has been taken off the U.S. economy
in the last week with this natural disaster and the prospect that
the Fed may be on hold now."

A report yesterday showed a gauge of U.S. manufacturing fell for the
first month in three in August and the National Association of
Purchasing Management-Chicago said the previous day its gauge of
regional manufacturing showed a contraction. Durable goods orders
had the biggest decline in July since January 2004, an Aug. 24
Commerce Department report showed.

"The dollar is on the defensive mainly by virtue of fears about U.S.
growth and the effects of the hurricane," said Daragh Maher, senior
currency strategist in London at Calyon, the securities unit of
Credit Agricole SA. "The pressure will be for the dollar to weaken
further, but I don't think it is justified by the payrolls itself."

Still, some strategists, including Sinche at Bank of America, said
expectations the Fed will stop raising interest rates are excessive
and the dollar may have reached a bottom against the euro. Both
Lehman Brothers and Bear Stearns are keeping their predictions for
the Federal Reserve's year-end interest-rate target at 4.25 percent.

"The adjustment in Fed expectations has gone too far," Sinche
said. "The likelihood is the fed funds rate ends up higher early
next year than is currently discounted by the markets." He expects
the dollar to trade at $1.19 per euro and 107 yen at the end of the
year.

The yen headed for a fourth weekly gain in five against the dollar
as Japanese stocks rose and polls showed higher approval ratings for
Prime Minister Junichiro Koizumi before Sept. 11 elections.

Japan's economy, the world's second-biggest, is in a "lasting and
self-sustaining" recovery, Bank of Japan Deputy Governor Toshiro
Muto said today, indicating that deflation of more than seven years
may be close to an end.

The Nikkei 225 Stock Average has risen 6.7 percent since Koizumi
dissolved Parliament on Aug. 8. Koizumi called an election to see if
voters support his plan to sell the postal system.

"Expectations foreign investors will keep putting more money into
Japanese equities are supporting the yen," said Tetsu Aikawa, a
currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's
fourth-biggest lender. "Growing support for Koizumi is also positive
for the yen because he is considered a reformer. A victory means a
stable administration, which will make it easier to promote reform."

The yen may rise to around 109.60 per dollar before the payrolls
data, he said.

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