Dollar Set for Weekly Gain on Fed Steps to Restore Confidence

Dollar Set for Weekly Gain on Fed Steps to Restore Confidence

By Stanley White

March 21 (Bloomberg) -- The dollar headed for the first weekly advance against the euro and the yen in at least a month after Federal Reserve Chairman Ben S. Bernanke accepted more collateral for loans, restoring confidence in financial markets.

The U.S. currency rose against the pound and the Swiss franc this week after the Fed made an emergency cut to the rate it charges banks to borrow and said it would swap Treasuries for mortgage-backed securities. The Fed also lent $28.8 billion to U.S. securities firms, its first extension of credit to non- banks since the Great Depression.

``The dollar is enjoying a bounce,'' said Hideki Amikura, deputy general manager of currencies at Nomura Trust and Banking Co. in Tokyo, a unit of Japan's largest brokerage. ``The Fed is working to restore confidence. U.S. investment bank earnings weren't as dire as some predicted.''

The dollar traded at $1.5444 per euro, as of 3:52 p.m. in Tokyo, set for a 1.5 percent gain in the past five days, the first weekly advance over a month. The dollar bought 99.61 yen, little changed from late yesterday and up 0.6 this week, the first weekly gain since Feb. 15. The yen rose 1 percent this week to 153.83 per euro, touching the strongest since August.

Currency moves may be exaggerated today as trading volume will be less than half of normal due to public holidays in the U.S., the U.K. and other financial markets, said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co.

The dollar may rise to 101 yen in the next few days, Nomura Trust's Amikura forecast.

The dollar bought 5.2566 kroner from 5.2630 late yesterday, when it touched the highest since Feb. 26. The U.S. currency was up 3 percent against the krone this week. Australia's dollar was little changed at 90.27 U.S. cents, close to a five-week low and on course for a 3.7 percent decline this week.

Fed Moves

Fed officials on March 11 announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. Yesterday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans.

Earlier this month, the Fed increased the size of separate funding auctions to $100 billion in March from a previously announced $60 billion.

The Fed yesterday said it had lent $28.8 billion to large U.S. securities firms under the program announced on March 16, its first extension of credit to non-banks since the 1930s.

The Fed also put taxpayer money at risk by making available up to $30 billion to JPMorgan Chase & Co. for the purchase of Bear Stearns.

`Calm Look'

The Fed cut on March 18 its target lending rate by three- quarters of a percentage point to 2.25 percent, saying ``measures of inflation expectations have risen.'' The cut was smaller than the 1 percentage point traders had expected with 90 percent certainty before the meeting, according to futures traded on the Chicago Board of Trade.

The tumble in commodity prices and the dollar's rebound gained momentum after the size of the cut sapped demand for oil and gold as a hedge against accelerating inflation.

``The dollar's rise against commodities currencies is likely to extend into next week,'' Soma said. ``Traders took a calm look at their bets and realized they can't continue to buy commodities in this environment.''

The Australian dollar may fall to 89 U.S. cents in a few days, Soma forecast.

Earnings Reports

Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley all said this week first-quarter profits fell less than analysts' estimates. Banks around the world have posted $195 billion in writedowns and credit losses, according to Bloomberg data, due to rising delinquencies on mortgages to U.S. homeowners with poor credit.

The euro headed for a weekly loss on speculation growth in the 15 countries that share the currency will slow and subprime loan losses will spread at European investment banks.

Credit Suisse Group, Switzerland's second-largest bank, said it will write down $2.65 billion after a ``small number'' of its traders deliberately mispriced residential mortgage- backed bonds. Credit Suisse also said it's unlikely to make a profit this quarter.

The French statistics office cut its growth forecast and raised its inflation forecast. Growth in France, Europe's second-largest economy, will slow to 0.3 percent in the second quarter from 0.4 percent in the previous quarter.

``The euro has some room to adjust lower,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``We're getting confirmation that subprime is shifting to the European financial sector. The euro-zone economy will start to slow from here on.''

The euro may fall to $1.53 next week, he said.

Commodity Currencies

``The dollar's rise against commodities currencies is likely to extend into next week,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's fifth-largest brokerage by revenue. ``Traders took a calm look at their bets and realized they can't continue to buy commodities in this environment.''

The Australian dollar may fall to 89 U.S. cents in a few days, Soma forecast.

The U.S. Dollar Index traded on ICE Futures in New York, which compares the currency with those of six trading partners, rose for a third day, to 72.8 from 72.144. The gauge fell to a record 70.698 on March 17, the same day the dollar fell to a record low against the euro.

``Commodities -- one of the few remaining long trades -- have turned south,'' BNP Paribas SA strategists led by Hans- Guenter Redeker wrote in a research note yesterday. ``The currency market is next in line, forcing investors out of yielding positions. We underline our bearish commodity currency call. The dollar will rebound.''

The dollar may rise to 5.47 kroner and 85 cents per Australian dollar at the end of this year, BNP Paribas forecast.

Gold posted its biggest weekly drop since 1990, falling from a record $1,032.70 an ounce on March 17. Oil has dropped 8.9 percent from a record this week, and copper had its biggest weekly slide in 10 months.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net