Dollar Set for Weekly Drop on Speculation Fed Will Keep Easing

The dollar was poised to end three consecutive weeks of gains against the euro on speculation the Federal Reserve will maintain stimulus measures to secure the U.S. economy’s recovery.

The greenback traded near the lowest level in one week against the 16-nation euro before reports forecast to show a slide in U.S. business activity and a rebound in initial jobless claims. The yen was set to break a two-week advance against the euro after a government report showed Japan’s consumer prices slid in November, backing expectations the Bank of Japan will keep interest rates near zero.

“Speculation about an early exit from credit easing in the U.S. may weaken if incoming data confirm a patchy recovery,” said Keiji Matsumoto, a strategist in Tokyo at Nikko Cordial Securities Inc. “It looks to be premature to conclude that the dollar carry-trade will come to a full end.”

The dollar was at $1.4390 per euro at 4:33 p.m. in Tokyo from $1.4338 a week ago and $1.4380 yesterday in New York. It appreciated to $1.4218 on Dec. 22, the strongest level since Sept. 4, and fell back to $1.4418 yesterday, the lowest since Dec. 17. The dollar lost 0.4 percent this week following a 1.9 percent advance in the previous week. The dollar traded at 91.45 yen from 91.54 yesterday. It rose 1.1 percent this week. The euro was at 131.65 yen from 131.63 in New York. It gained 1.5 percent this week following a 0.4 percent decline.

Many global markets, including those in the U.S., Singapore and Australia, are closed today for Christmas.

Jobless Claims

The Institute for Supply Management-Chicago Inc. will report on Dec. 30 its barometer of U.S. business activity fell to 55.1 in December from 56.1 the previous month, according to a Bloomberg News survey. Readings above 50 signal expansion.

The number of Americans filing claims for unemployment benefits in the week ending 27 probably rose to 460,000 after dropping to 452,000 in the previous week, the lowest level since September 2008, according to a separate survey ahead of the release of the data on Dec. 31.

Fed Bank of St. Louis President James Bullard said he sees interest rates remaining near zero in 2010 as the central bank tries to keep the recovery on track, the Wall Street Journal reported this week.

Clear Picture

“Unless we see a more clear picture about the withdrawal of dollars by the Fed, there is a good chance of investors tapping excess dollars again and resuming investments on higher-yielding currencies,” said Yuichiro Harada, senior vice president of the foreign-exchange division at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest lender.

The dollar pared weekly losses on speculation Treasuries will draw buying interest from global money managers.

The difference in yields between 2- and 10-year Treasuries reached a record 2.88 percentage points on Dec. 22 and was at 2.84 percentage points yesterday.

“Investors can generate stable returns just by re- investing funds raised in the U.S. back into Treasuries, and thereby avoiding the risks of currency fluctuations,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third- largest bank. “The dollar will benefit from this change of investment strategy.”

The spread between 10-year Treasury yields and the same maturity Japanese government bonds reached 2.53 percentage points yesterday, the widest gap since December 2007.

November Deflation

The yen was headed for a 5.2 percent drop against the dollar this month, the biggest since February. The Japanese government said today consumer prices, excluding fresh food, fell 1.7 percent in November from a year earlier, matching the median forecast in a Bloomberg survey.

Bank of Japan Governor Masaaki Shirakawa said in an interview with TV Tokyo this month that the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation.

No Fast Exit

“The BOJ can’t possibly seek an exit from stimulus anytime before other central banks do so,” said Masahiro Ito, senior manager of foreign-exchange sales and marketing at Central Tanshi FX Co., a unit of Japan’s largest money broker. “This will keep a lid on the yen.”

The Japanese currency traded as weak as 91.87 yen on Dec. 22 and 23, the lowest level since Oct. 27.

Losses in the yen were tempered on speculation Japanese exporters were taking advantage of this month’s decline to bring home foreign earnings.

“Exporters seem to be buying the yen in a last-minute attempt before the new year,” said Kazutoshi Yasuda, general manager of the markets department in Tokyo at FX Prime Corp., a foreign-exchange unit of Japanese trading house Itochu Corp.

Large Japanese manufacturers expect the yen to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s quarterly Tankan survey.