Dollar Falls as Traders Start to Bet Fed Will Cut Rates to 2%

The dollar fell toward an eight- year low against the yen as traders started to bet the Federal Reserve will lower interest rates by 1 percentage point to avoid a recession.

The currency also approached a record low versus the euro before reports this week that will probably show cooling U.S. retail sales and waning consumer confidence. Futures indicated 6 percent odds that the Fed will cut rates to 2 percent on March 18. The yen rose as foreign-exchange traders said the Bank of Japan won't intervene in currency markets.

``The Fed will be forced to lower rates down to 2 percent amid the slowing economy,'' said Yuji Saito, head of foreign- exchange sales in Tokyo at Societe Generale SA, France's second- largest bank by market value. ``I expect the dollar to fall below 100 yen this week.''

The dollar slipped to 102.10 yen at 2:24 p.m. in Tokyo from 102.67 yen on March 7, when it slid to 101.43, the lowest since January 2000. It also weakened to $1.5386 per euro from $1.5355 late last week, when it touched $1.5459 a euro, the weakest level since the European single currency's debut in 1999.

Malaysia's ringgit fell 1 percent to 3.1990 against the dollar, the biggest drop since June 8, 2007, after the ruling coalition government lost its two-thirds majority at weekend elections. The yen advanced 0.4 percent to 157.13 per euro, as the Cabinet Office said Japan's equipment orders jumped 19.6 percent in January, the fastest pace in more than seven years.

The U.S. currency declined to $2.0195 against the pound from $2.0134 on March 7, when it slumped to $2.0217, the lowest since Dec. 18. The dollar also dropped to 92.77 cents versus the Australian dollar from 92.68. It fell 0.5 percent to 1.0199 against the Swiss franc.

`Downside Risks'

``The deterioration in the U.S. economic outlook raises downside risks for dollar-yen,'' Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co., the third-largest U.S. bank, wrote in a research note today. The dollar may fall to 98 yen this month, Sasaki forecast.

Futures on the Chicago Board of Trade show traders on March 7 saw no chance the Fed will lower its target rate by 1 percentage point this month. They now see a 94 percent chance of a 75 basis point cut with remaining odds on a larger reduction.

The dollar slid before a Commerce Department report on March 13 that is forecast by economists surveyed by Bloomberg News to show growth in spending at U.S. retailers slowed in February. A separate industry report the next day will probably show consumer confidence fell this month to a 16-year low.

Toyota, Sony

Japanese authorities sold the currency on all four occasions since 1995 when the yen approached the 100 mark in a bid to support exporters from Toyota Motor Corp. to Sony Corp. When the yen strengthened to the eight-year high last week Finance Minister Fukushiro Nukaga stopped short of signaling that officials are concerned, only saying the government needs to watch currency moves ``carefully.''

``When I intervened, the U.S. agreed to it,'' said Eisuke Sakakibara, dubbed ``Mr. Yen'' for his ability to influence the foreign exchange market as Japan's top currency official from 1997 to 1999. ``The U.S. now welcomes a gradual decline in the dollar and Treasury takes the position of Detroit. This is affecting how Japan is responding now.''

UBS Forecast Change

UBS AG, the world's second-largest foreign-exchange trader, raised its one-month forecast for the yen to 102.50 against the dollar and 160 per euro from a previous estimate of 106 a dollar and 164 a euro.

``There is a lot of focus on whether dollar-yen will break 100,'' Ashley Davies, a currency strategist in Singapore at UBS, wrote in a research note published on March 7. ``Our view is that while not impossible, risk aversion is already elevated, and the markets will be wary of intervention.''

Futures traders are the most confident since February 2004 that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on March 7.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 56,285 on March 4, compared with net longs of 34,289 a week earlier.

The yen was also supported as higher volatility discouraged so-called carry trades. One-month implied volatility for the yen rose to 15.25 percent today, compared with 15 percent on March 7. Traders quote the gauge of expectations for future currency swings as part of pricing options.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that currency moves erase those profits.