Dollar Trades Near Record Low Against Euro on Rate Differential

Feb. 28 (Bloomberg) -- The dollar traded near a record low against the euro after the yield advantage on two-year German government debt over Treasuries widened to the most in more than five years.

The U.S. currency headed for a second monthly loss versus the euro and reached a 24-year low against the Australian dollar on speculation Federal Reserve Chairman Ben S. Bernanke will elaborate on plans to cut interest rates in testimony to the Senate today. The yield premium on two-year German bunds over similar-maturity U.S. debt widened to 1.41 percentage points today, the most since October 2002.

``I am super-bearish on the dollar,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``The yield differential is buffeting the dollar and favoring the euro.''

The U.S. currency traded at $1.5103 per euro at 6:40 a.m. in London, after touching $1.5144 in New York yesterday, the weakest since the euro's debut in 1999. The dollar dropped to 106.32 yen from 106.49 yen yesterday, when it fell to 105.96, the lowest since Feb. 7. It may decline to $1.52 a euro and 105.80 yen today, Ishikawa forecast.

The yen rose against the euro and 14 of the 16 most-active currencies as Asian stocks fell, encouraging investors to reduce holdings of higher-yielding assets funded with loans in Japan. It rose to 160.51 per euro from 161.01 in New York yesterday.

The yuan rose the most this year on speculation China will seek faster currency gains to slow inflation. It climbed 0.34 percent to 7.1174 per dollar, compared with 7.1420 yesterday.

February Slump

The Australian dollar touched 94.57 U.S. cents, the highest since March 1984, before trading at 94.07 cents, as traders bet the Reserve Bank of Australia will raise its 7 percent benchmark rate again next week. Australia's benchmark interest rate is 4 percentage points above the Fed's 3 percent target.

The currency's 14-day relative strength index against the U.S. dollar reached 75.74 yesterday. A level above 70 signals a currency is likely to change direction. Morgan Stanley, the second-largest U.S. securities firm, said in a research note yesterday investors should sell the Australian dollar once it hits 94 U.S. cents.

The dollar is the second-worst performer versus the euro this month among the 16 major currencies after the British pound, falling 1.7 percent, as the housing recession worsened and consumer confidence sank. An index that tracks the U.S. currency against six major counterparts dropped yesterday to 74.213, the lowest since its inception in 1973.

The dollar weakened past $1.51 per euro yesterday after Bernanke told the House Financial Services Committee that the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy. Bernanke testifies to the Senate Banking Committee today at 10 a.m. in Washington.

Yen, Stocks

Futures on the Chicago Board of Trade show traders expect the Fed to cut rates to at least 2 percent by mid-year, from 3 percent now. The bank has slashed rates from 5.25 percent in September, and is scheduled to meet next on March 18.

The yen advanced versus the Canadian dollar and the South African rand, two favorites of so-called carry trades.

A Japanese government report today showed January factory production fell at twice the pace economists predicted, fueling speculation a slowdown in the U.S. is spreading into Japan.

``The yen is being propelled by risk reduction among investors,'' said Koji Fukaya, a senior strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank AG, the world's biggest currency trader.

Euro, Jobs

Japan's currency may move between 106 and 107 per dollar for the rest of this week, Fukaya said.

The yen advanced 0.2 percent to 108.36 against the Canadian dollar from 108.63. It rose 0.7 percent to 14.1980 versus the rand from 14.3132. The MSCI Asia Pacific Index of regional stocks declined 0.5 percent, halting a three-day, 4 percent rally.

The euro was supported by speculation a German report today will show the unemployment rate fell to the lowest in more than 15 years in February. Germany's jobless rate dropped to 8 percent this month, the lowest since November 1992, according to a Bloomberg News survey of economists before the government report at 9:55 a.m. local time.

The euro advanced versus 10 of the 16 most-active currencies in the past five days after European Central Bank policy makers yesterday reiterated concern that inflation may quicken and voiced optimism economic growth may be resilient to a U.S. slowdown.

``ECB officials indicated there's no change in their hawkish stance on rates,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The euro is likely to strengthen.''

Europe's single currency may rise to $1.5150 and 161.35 yen today, Soma forecast.

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