March 25 (Bloomberg) -- The dollar fell the most against the euro in almost two weeks on speculation the Federal Reserve will cut the target lending rate by as much as a half-percentage point next month to revive economic growth.
The U.S. currency reached its lows of the day as a private report showed consumer confidence fell more than forecast in March. The Australian and New Zealand dollars strengthened as a rally in European and Asian stocks encouraged investors to buy higher-yielding assets.
``We're waking back up to the economic reality, which is that the U.S. is in the midst of a slowdown,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million under management. ``The worst is yet to come. The dollar is going to stay weak.''
The dollar fell 1 percent to $1.5582 per euro at 10:29 a.m. in New York, from $1.5423 yesterday. It declined 0.9 percent to 99.82 yen, from 100.74 yesterday. The euro traded at 155.59 yen, compared with 155.39 yesterday.
``The dollar resumed its decline,'' said Samarjit Shankar, director of global strategy for the foreign- exchange group in Boston at Bank of New York Mellon. ``The market is taking a reality check: No, nothing has changed. The economy in the U.S. will deteriorate further.''
Fed Rate Cuts
The Fed on March 18 cut the target rate for overnight lending between banks by 0.75 percentage point to 2.25 percent. Futures contracts on the Chicago Board of Trade show there's a 34 percent chance the Fed will trim the target by a half- percentage point at its April 30 meeting, compared with a 28 percent likelihood yesterday. The remaining odds are for a reduction of a quarter-percentage point.
The Icelandic krona surged against all 177 currencies tracked by Bloomberg News after the central bank unexpectedly raised its benchmark interest rate to 15 percent at an unscheduled meeting.
The krona climbed almost 5 percent to 115.602 per euro today, before trading at 117.698, compared with 121.591 yesterday. Concern that credit losses will widen last week triggered a sell-off in the currency, causing it to slump 9.3 percent against the euro and to a record 127.985 on March 19.
The euro was buoyed before European Central Bank President Jean-Claude Trichet testifies to the European Parliament's economic and monetary affairs committee tomorrow. He said on March 6 anchoring inflation expectations is the ``highest priority'' after the central bank left its main interest rate unchanged at a six-year high of 4 percent.
Trichet on Inflation
Trichet will ``remain hawkish against inflation risks,'' said Koji Fukaya, a senior currency strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank. ``The euro has an upside risk with his speech.''
European Central Bank Vice President Lucas Papademos called the euro's appreciation ``excessive'' and said the bank is closely watching currency markets. The Group of Seven nations are scheduled to meet in Washington on April 12.
``Recent movements in exchange rates have been excessive'' and are a ``cause for concern,'' Papademos said in an interview with Russia's Izvestia newspaper yesterday, according to a transcript issued by the ECB. ``We will continue to monitor foreign-exchange markets very closely.''
The U.S. currency slipped 0.8 percent against the Australian dollar to 91.35 U.S. cents and 0.8 percent versus the New Zealand dollar to 80.39 U.S. cents.
Carry Trades
In carry trades, traders get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two. The risk is currency fluctuations erase profit.
The benchmark interest rate is 0.5 percent in Japan and 2.25 percent in the U.S., compared with 2.75 percent in Switzerland, 8.25 percent in New Zealand and 7.25 percent in Australia. The yen also fell 0.6 percent to 91.76 per Australian dollar and 0.3 percent to 80.64 per New Zealand dollar.
The MSCI World Index added 1.8 percent a day after JPMorgan Chase & Co. quadrupled its bid for Bear Stearns Cos. to about $10 a share, bolstering confidence in financial assets. The Standard & Poor's 500 Index fell 0.3 percent on the decline in U.S. consumer confidence.
The U.S. economy slipped into a recession in the first three months of the year and will remain there in the second quarter, putting pressure on the dollar to fall further, said Deutsche Bank AG, the world's largest currency trader, in a report yesterday. The dollar may weaken to $1.60 against the euro in the first half of the year before strengthening to $1.45 by year-end as the economy recovers, Deutsche Bank said.
Confidence Index
The Conference Board's confidence index fell to 64.5, a five-year low, from a revised 76.4 in February, the New York- based research group said today. Economists forecast the measure would fall to 73.5 from a previously reported 75, according to the median of 61 forecasts in a Bloomberg News survey.
Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey showed today.
The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent decrease in December. The gauge has fallen for 13 consecutive months.
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