March 20, 2009 / 5:22 AM / in 10 years

FOREX-Dollar on track for worst week in 24 years

* Dollar wounded as investors fret about depreciation

* Dlr index on track for largest weekly fall since 1985

* Euro set for biggest weekly rise since 1999 inception

* Kiwi racks up biggest weekly surge since 1985 float

By Koh Gui Qing

SYDNEY, March 20 (Reuters) - The dollar headed for its biggest weekly fall in 24 years on Friday as investors feared the Federal Reserve’s plans to buy longer-term government debt would erode the world’s reserve currency.

The dollar has slid 5.1 percent against a basket of major currencies .DXY this week, set for the steepest decline since 1985 when the major economies agreed a formal depreciation of the dollar in the Plaza Accord.

A tumble of more than 5.2 percent would mean this week’s dollar plunge is the biggest since 1973 when the Bretton Woods system that ruled the post-war period was finally abandoned, ushering in the modern era of free-floating exchange rates.

“This is a historic moment, the start of debasement of the world’s reserve currency, and it feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac,” said Alan Ruskin, chief international strategist a RBS Greenwich Capital.

Analysts said the Fed’s radical decision to buy $300 billion of longer-term government debt and vastly expand its balance sheet beyond the current $2 trillion meant more and more of the U.S. currency would be created, straining demand.

The Fed’s historic move also drove Treasury yields down by the most in 26 years, reducing the dollar’s yield allure, while raising inflationary risks in the longer term.

Taken together, analysts said the safe-haven appeal of the U.S. dollar, which had soared to a three-year high against a basket of currencies only earlier this month, is tarnished.

“U.S. dollars will be flooding the world as the printing presses work overtime,” said Stephen Koukoulas, a strategist at TD Securities in London.

“With the supply of the U.S. dollar growing and demand for U.S. dollar stable at best or falling sharply, the price of U.S. dollar has to fall,” Koukoulas said in a note to clients titled “Bye bye U.S. dollar. Sell sell U.S. dollar!”

Investors seemed to agree, selling the U.S. currency in favour of ones with higher yields such as the euro, Australian and New Zealand dollars despite a retreat in equity markets in Asia and Wall Street. [MKTS/GLOB]

In early Asian trading, the dollar index edged up 0.2 percent from late U.S. trade after having fallen as far as 82.631 on Thursday, the lowest in two months.

The euro was resting at $1.3655 EUR=, having climbed to a peak of $1.3737 in New York, the highest since early January.

The single currency was up almost 6 percent from last Friday’s $1.2922 close, the biggest increase since its inception in 1999.

But the dollar edged up 0.1 percent to 94.68 yen JPY=, after falling as far as 93.52 and having shed 4 percent on the week.

The New Zealand dollar was the biggest beneficiary of the dollar's woes and the revival of risk appetite, surging 6.5 percent on the week -- on track for its best week since the currency was floated in 1985. The kiwi was at $0.5570 NZD=D4.

In a research note titled “The day the dollar died”, currency strategists at Standard Chartered said the Fed is now targeting both short- and long-term interest rates to kick start credit markets and lending.

“This is an extraordinary shift in intent that will give risk appetite a shot in the arm and send the U.S. dollar reeling at the same time.”

Standard Chartered said it expected the euro to reach $1.45 by the end of the second quarter and $1.55 by the end of the year, while the dollar was poised to fall to 88 yen — near a 13-year low hit earlier this year. (Additional reporting by Eric Burroughs in Hong Kong) (Editing by Kazunori Takada)

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