The dollar had its biggest decline in two weeks against the yen as expectations waned that the Federal Reserve will cut interest rates to bolster a faltering economic recovery.
The US currency also slipped against the euro, paring its weekly gain to 1.7 percent, after a Washington Post article said speculation of a rate reduction as soon as next week "may be the product of wishful thinking."
The dollar had rallied the past three weeks in part as expectations grew that the Fed would cut rates and help lure investment to the US.
Investors are "now starting to take a more realistic view of what the Fed is going to do, which has been pushing the dollar down," said Patrick Collins, a currency trader at Ruesch International in Washington. He said he doesn't expect the Fed to cut rates next week.
The dollar declined to Japanese yen 120.16 at 5:20pm Friday in New York from Japanese yen 120.99 Thursday, trimming its weekly gain to 1.1 percent. That's the dollar's biggest one-day decline since July 24. It weakened 0.3 percent to US$0.9698 per euro, three days after reaching a seven-week high of US$0.9624.
Yields on some interest-rate future contracts rose the past two days as traders pared bets for a rate reduction.
The 1.705 percent yield on the August federal funds futures contract, a gauge of expectations for the average overnight lending rate for the month, suggests traders see about a 30 percent chance of the Fed cutting its 1.75 percent target rate at next week's meeting. That's down from a 35 percent probability seen two days ago.
"There's talk about no Fed ease, and there's some dollar selling on that," said John Cholakis, a trader at Natexis Banques Populaires.
While lower rates can weaken a currency by reducing returns on a country's fixed-income securities, analysts say a reduction now would strengthen the dollar by bolstering growth expectations and luring investors to assets such as stocks. The Standard & Poor's 500 Index completed yesterday its biggest three-day rally in almost 15 years as rate cut speculation grew.
"If the Fed cuts rates, the scare of a [contraction] in the economy will be looked upon as overdone, helping the currency,'' said Nicholas Reitenbach, the chief investment officer of Pinnacle International Management, which manages more than US$600 million.
Economic growth slowed to 1.1 percent in the second quarter from 5 percent in the first.
Morgan Stanley economist Dick Berner told his clients Friday to expect a cut next week even after a three-day surge in stocks eased concern that the economy may fall back into recession. He said the Fed will cut the overnight rate as much as 50 basis points to 1.25 percent. That makes Morgan Stanley the only one of 22 Wall Street firms that trade with the central bank, known as primary dealers, to forecast a cut next week.
"We believe that [Fed] officials want to insure that economic hesitation does not turn into broader-based economic weakness,'' Berner said in a research note.
While Morgan Stanley is alone predicting a reduction, eight of the primary dealers say the Fed will signal at the meeting that it may cut rates in months ahead after 11 reductions in 2001. The firms predict the Fed will say weak growth is a bigger threat to the economy than inflation.
The 1.57 percent yield on the October fed funds futures contract suggests that traders see a 70 percent chance of a rate reduction at the Fed's September meeting, down from the 90 percent chance seen two days ago.
Demand for dollars also fell today after WorldCom Inc. said it found an additional US$3.3 billion in misreported financial results, renewing concern about the reliability of US corporate accounting. "WorldCom's revelation of further losses is weighing on the dollar," Cholakis said.
Evidence of a larger trade surplus in Germany, the biggest economy using Europe's common currency, also helped to boost the euro against the dollar, traders said.
ADVANCED: Previously, Taiwanese chip companies were restricted from building overseas fabs with technology less than two generations behind domestic factories Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), a major chip supplier to Nvidia Corp, would no longer be restricted from investing in next-generation 2-nanometer chip production in the US, the Ministry of Economic Affairs said yesterday. However, the ministry added that the world’s biggest contract chipmaker would not be making any reckless decisions, given the weight of its up to US$30 billion investment. To safeguard Taiwan’s chip technology advantages, the government has barred local chipmakers from making chips using more advanced technologies at their overseas factories, in China particularly. Chipmakers were previously only allowed to produce chips using less advanced technologies, specifically
The New Taiwan dollar is on the verge of overtaking the yuan as Asia’s best carry-trade target given its lower risk of interest-rate and currency volatility. A strategy of borrowing the New Taiwan dollar to invest in higher-yielding alternatives has generated the second-highest return over the past month among Asian currencies behind the yuan, based on the Sharpe ratio that measures risk-adjusted relative returns. The New Taiwan dollar may soon replace its Chinese peer as the region’s favored carry trade tool, analysts say, citing Beijing’s efforts to support the yuan that can create wild swings in borrowing costs. In contrast,
VERTICAL INTEGRATION: The US fabless company’s acquisition of the data center manufacturer would not affect market competition, the Fair Trade Commission said The Fair Trade Commission has approved Advanced Micro Devices Inc’s (AMD) bid to fully acquire ZT International Group Inc for US$4.9 billion, saying it would not hamper market competition. As AMD is a fabless company that designs central processing units (CPUs) used in consumer electronics and servers, while ZT is a data center manufacturer, the vertical integration would not affect market competition, the commission said in a statement yesterday. ZT counts hyperscalers such as Microsoft Corp, Amazon.com Inc and Google among its major clients and plays a minor role in deciding the specifications of data centers, given the strong bargaining power of
Nvidia Corp’s demand for advanced packaging from Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) remains strong though the kind of technology it needs is changing, Nvidia CEO Jensen Huang (黃仁勳) said yesterday, after he was asked whether the company was cutting orders. Nvidia’s most advanced artificial intelligence (AI) chip, Blackwell, consists of multiple chips glued together using a complex chip-on-wafer-on-substrate (CoWoS) advanced packaging technology offered by TSMC, Nvidia’s main contract chipmaker. “As we move into Blackwell, we will use largely CoWoS-L. Of course, we’re still manufacturing Hopper, and Hopper will use CowoS-S. We will also transition the CoWoS-S capacity to CoWos-L,” Huang said
RSS