Dollar slides on grim U.S. economic outlook

NEW YORK (Reuters) - The U.S. dollar was lower against a basket of currencies for the sixth day on Tuesday as Federal Reserve Chairman Ben Bernanke gave a grim assessment of the U.S. housing sector, adding to mounting fears of recession.

A passer-by is silhouetted in front of a display showing movements of the current Nikkei share average outside a brokerage in Tokyo March 3, 2008. REUTERS/Issei Kato

Still, the U.S. currency staged a late session rebound versus the Japanese yen after U.S. stocks pared some of their sharp losses.

“The bias towards the U.S. dollar remains negative, but we saw it regain some strength versus the yen in late trading as the bounce in stocks abated some risk aversion,” said Joe Manimbo, a currency trader at Ruesch International in Washington.

Also on Tuesday, comments by euro finance ministers ahead of the European Central Bank meeting on Thursday helped put a halt to the euro’s five-day run versus the dollar. However, investors are convinced that the poor U.S. economic outlook will keep the Fed on its easing path, which adds pressure on the dollar.

“Every time Bernanke and Treasury Secretary (Henry) Paulson speak, the dollar weakens immediately. The problem in our view is that the U.S. representatives are so downbeat on the U.S. economy,” said Mark Meadows, currency strategist at Tempus Consulting in Washington.

Bernanke warned that mortgage delinquencies and foreclosers were likely to rise while home prices would fall and he called for active measures to stabilize the housing market.

In late afternoon in New York, the dollar was little changed at 103.26 yen JPY=, after it touched a session low of 102.66, near a three-year trough reached on Monday.

Related Coverage

Analysts reckon the dollar could fall as low as 100 yen, a level last breached in late 1995. The yen had risen earlier as equities markets fell, which prompted investors to unwind trades that were funded by borrowing in the low-yielding Japanese currency.

“The interest-rate compression between the dollar and the yen is starting to become very substantial,” said Boris Schlossberg, senior currency strategist at in New York. “As it gets closer to the 100 (yen) level you are going to see more speculative flows coming in, trying to test the Bank of Japan to see if they are willing to intervene at this point.”

The euro was also little changed at 157.03 yen but dropped 0.4 percent to 1.5783 Swiss francs EURCHF=. Against the Swiss currency, the dollar declined 0.4 percent to 1.0381 Swiss francs.

Low-yielding currencies such as the yen tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their respective countries.

Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, expressed concern about excessive exchange rate moves, which gave the dollar some respite after recent successive record lows.

The euro was flat at $1.5205, off the $1.5275 all-time high set on Monday, according to Reuters data. The dollar index .DXY, which tracks the value of the greenback against a basket of currencies, slid 0.1 percent to 73.689.

Analysts said the euro’s retreat against the dollar was likely temporary, with the ECB likely to remain focused on inflation and U.S. economic data most likely to disappoint.

“No one really expects the ECB to raise interest rates this year because of the global financial situation. We are most likely to see them talk tough on inflation,” said Tempus Consulting’s Meadows.

The U.S. dollar surged 0.5 percent to C$0.9945 after the Bank of Canada cut interest rates by 50 basis points.

Additional reporting by Lucia Mutikani; Editing by Diane Craft