The dollar declined for a third week as Federal Reserve officials including Chairman Ben S. Bernanke signaled they favor greater ``insurance'' against an economic slowdown amid the slump in the housing market. European Central Bank council member Klaus Liebscher said he sees ``significant'' upside risks to inflation.
``In terms of the subprime crisis, the U.S. has been the centre of the storm and it will have to pay,'' said Bilal Hafeez, global head of currency strategy in London at Deutsche Bank AG, the world's largest foreign currency trader. ``The euro will continue going higher'' and may trade at $1.55 by the end of the first quarter.
The dollar fell to $1.4881 against the euro, the weakest since declining to a record low on Nov. 23, and was trading at $1.4894 at 10:21 a.m. in London, from $1.4776 on Jan. 11 in New York. The euro traded at 160.44 Japanese yen, from 160.79 late last week. Against the U.K. pound, it advanced 0.5 percent to 75.89 pence, after rising to a record 75.92 pence, from 75.52.
The euro climbed to a record against the currencies of the region's 24 biggest trading partners on Jan. 11. It advanced against all but three of the 16 most active currencies today.
Automatic Orders
The common European currency accelerated gains against the dollar after rising beyond $1.4825 and $1.4850, where orders to buy the currency were placed, said Lee Wai Tuck, a strategist at Forecast Pte Ltd. in Singapore. Traders sometimes place automatic instructions to limit losses in case bets go the wrong way. Trading volumes are below average because of a public holiday in Japan.
The dollar fell against 15 of the 16 most-active currencies before a Commerce Department report economists in a Bloomberg News survey say will show retail sales were unchanged in December. The currency dropped to $1.9628 against the pound from $1.9566, and was trading at 1.0907 against the Swiss franc from 1.1014. It also fell to the lowest since Nov. 27 against the yen and was recently trading at 107.72 yen.
The euro has risen 15 percent in the past 12 months against the dollar as the Fed cut borrowing costs three times since Sept. 18 to prevent the worst housing slump in 16 years from dragging the economy into recession.
`Growth a Concern'
``We're expecting continued U.S. dollar weakness,'' said Tobias Davis, senior foreign-exchange dealer at Custom House Global Foreign Exchange in Sydney, in an interview with Bloomberg television. ``It really is a concern that growth is grinding to a halt faster than some people expect.''
Fed funds futures contracts on the Chicago Board of Trade show 66 percent odds the Fed will cut its 4.25 percent target rate for overnight bank loans to 3.75 percent at its Jan. 30 meeting. The odds have risen from 6 percent a month ago. The odds of a decrease to 3.5 percent were 34 percent, compared with zero a week ago. The ECB kept its benchmark rate unchanged at 4 percent last week.
The yield spread between German two-year notes and same- maturity Treasuries was 1.13 percentage points, near the widest since November 2002.
The euro's gains may be limited amid speculation its advance will increase pressure on the ECB to keep interest rates unchanged even as inflation stays above its 2 percent ceiling.
European Officials
``We cannot live with a euro at this level with three other currencies which are weak,'' France's European Affairs Minister Jean-Pierre Jouyet said in a Jan. 12 interview in Malta, echoing views expressed by President Nicolas Sarkozy. Italian Prime Minister Romano Prodi said the day before ``everybody is concerned.'' The three other currencies Jouyet referred to were the yuan, the yen and the dollar.
ECB's Liebscher said in an interview with Austria's WirtschaftsBlatt newspaper published today he sees ``significant'' upside risks to inflation.
That ``reinforces the view that the ECB may, at least, not lower the rates,'' said Tetsuo Yoshikoshi, a market analyst in Singapore at Sumitomo Mitsui Banking Corp., Japan's third-biggest lender.
The Fed is ``ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke told the Women in Housing and Finance and Exchequer Club in Washington on Jan. 10.
The dollar also fell against the yen as one-month implied volatility for yen options against the dollar rose to 13 percent from 12 percent late in New York on Jan. 11. Higher volatility may deter so-called carry trades funded in yen as it exposes the bets to greater exchange-rate fluctuation risks.
In carry trades, investors borrow in countries with lower interest rates and invest in those with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.
