Dollar Slumps Below 96 Yen to 12-Year Low on Subprime Losses

March 17 (Bloomberg) -- The dollar fell below 96 yen for the first time in 12 years after the Federal Reserve's emergency weekend cut in its discount interest rate and the sale of Bear Stearns Cos. to JPMorgan Chase & Co.

The dollar dropped to a record low against the euro and the Swiss franc as the Fed made its first weekend change in borrowing costs since 1979 and Bear Stearns was acquired for less than a 10th of its March 14 value. Traders increased bets the Fed will slash its benchmark target rate by 1 percentage point tomorrow to stem a slump in confidence in financial markets.

``The dollar is facing a credibility crisis,'' said Koji Fukaya, a senior currency strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``All the markets are entering a vicious cycle.''

The dollar fell to as low as 95.76 yen, the weakest since Aug. 15, 1995, before trading at 97.16 yen at 8:32 a.m. in London from 99.09 yen late in New York on March 14. Against the euro, the dollar dropped to $1.5903, the weakest since the creation of the single European currency in 1999. It slid to a record 0.9638 Swiss francs. The dollar may drop to 95 yen this week, Fukaya said.

The Australian and New Zealand dollars fell on speculation investors will spurn higher-yielding currencies as financial turmoil deepens. Australia's currency declined to 92.79 U.S. cents from 93.74 cents. The New Zealand dollar weakened to 80.88 U.S. cents from 81.34 cents. The British pound fell to $2.0137 from $2.0202.

Stocks Slump

The currency set record lows against the euro for five consecutive days as investor confidence tumbled, sending U.S. stocks lower for a third straight week. The MSCI Asia-Pacific index of regional shares fell 2.4 percent, its third day of declines. Gold and crude oil rose to a record.

South Korea's won fell 3.2 percent to 1,029 per dollar, the weakest since December 2005, from 997.40 in late Asian trading on March 14. The Indonesian rupiah fell 0.3 percent to 9,285.

Volatility implied by one-month dollar-yen options rose to 21.78 percent after earlier reaching 24 percent, the highest since January 1999. Traders quote the gauge of expected swings in exchange rates when pricing options.

Japan's Finance Minister Fukushiro Nukaga said recent moves by the yen are ``excessive.'' The government is not considering any specific action at the moment, he said.

Goldman Sachs Group Inc. and Morgan Stanley strategists say that coordinated action by policy makers to curb the slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates.

Risk Aversion

Investors should sell dollars for yen due to stress in the financial system, Goldman Sachs analysts Thomas Stolper and Jens Nordvig, wrote in a note today. ``Risk aversion, falling rate differentials and potentially large shifts in corporate hedging behavior suggest the yen could rally further,'' they wrote.

The U.S. currency has lost about 16 percent against the euro and 17 percent versus the yen in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate 2.25 percentage points. The Fed lowered the rate it charges commercial banks for loans by a quarter percentage point to 3.25 percent in early Asian trade.

``The Fed's measures just provided a temporary impact,'' said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc, the fourth-biggest currency trader. ``The injection of public money should be really needed. The dollar may fall to 96 yen this week.''

JPMorgan Chase bought Bear Stearns for about $240 million after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Fed Outlook

The likelihood the Fed will cut its target rate for loans between banks by 1 percentage point to 2 percent at a meeting tomorrow rose to 56 percent at the end of last week, up from 6 percent a week earlier, futures on the Chicago Board of Trade showed. The balance of bets is on a cut to 2.25 percent. The euro region's main rate is 4 percent.

``The money markets are thinking there's a very good chance that the Fed will cut rates by 1 percentage point,'' Ashley Davies, a strategist in Singapore at UBS AG, the second-largest currency trader, wrote in a research note today. The U.S. currency may decline to $1.60 per euro, according to the report.

The dollar is the weakest since at least 1971 based on a Fed trade-weighted index, helping push oil, grains and metals, which are priced in the U.S. currency, to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks, concerned that inflation is accelerating, from cutting rates, further undermining the dollar.

Asset Appeal

``The relative return on U.S. assets is not attractive enough and we have moved back into looking for dollar weakness,'' said Robert Robis, a bond fund manager in New York at OppenheimerFunds Inc., which oversees $260 billion. Robis last month was betting the dollar would rally versus the euro.

Goldman Sachs will reveal $3 billion in writedowns when it releases quarterly earnings tomorrow, the Daily Telegraph reported yesterday, without saying where it got the information. Lehman Brothers Holdings Inc., which obtained a $2 billion credit line on March 14 to improve its finances, also releases earnings tomorrow.

``The Fed's action indicates the extent of credit problems in the market,'' said Thomas Harr, a senior currency strategist at Standard Chartered Plc in Singapore. ``Risk appetite is still very fragile. It improved for no more than 10 minutes after the Fed move and it's all collapsed since.''

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.