Dollar Heads for Weekly Gain as Banks Weather Credit Turmoil

By Agnes Lovasz and Stanley White

July 18 (Bloomberg) -- The dollar headed for a weekly advance against the euro, rebounding from a record low on signs U.S. investment banks will withstand credit-market losses stemming from the collapse of the subprime-mortgage market.

The U.S. currency also rose versus the yen today after Citigroup Inc., the biggest U.S. bank, reported better-than- expected second-quarter earnings. The pound fell on speculation the U.K. government will boost borrowing as Chancellor of the Exchequer Alistair Darling introduces new spending guidelines.

``Generally speaking there's a belief in the market that conditions will stabilize,'' said Derek Halpenny, head of currency research in London at Bank of Tokyo-Mitsubishi. ``That's given the impetus to the dollar.''

The dollar was at $1.5864 per euro at 6:43 a.m. in New York, from $1.5863 yesterday and $1.5938 at the end of last week. It dropped to an all-time low of $1.6038 on July 15. The currency climbed to 106.55 yen from 106.28 yen. The yen was at 169 per euro, from 168.58 yesterday and 169.46 on July 11.

The dollar will still fall to $1.62 per euro in three months, driven by a deteriorating U.S. economy, Halpenny said.

Citigroup's second-quarter net loss was $2.5 billion, compared with earnings of $6.23 billion a year earlier, the company said today. Analysts estimated the loss would be $3.67 billion, according to a Bloomberg survey. JPMorgan Chase & Co. and Wells Fargo & Co. reported better-than-expected earnings this week.

The pound dropped to 79.44 pence per euro, from 79.16 yesterday, and to $1.9963 from $2.0038. The U.K. government's new spending rules will allow it to break limits on public sector debt, the Financial Times said today, without citing anyone. A Treasury spokesman said the report is ``pure speculation.''

Weaker Yen

The yen was set for a weekly loss against the South African rand as a rally in U.S. stocks following JPMorgan's earnings yesterday encouraged so-called carry trades.

The yen fell 1.6 percent this week to 14.0737 against the South African rand. It also declined 0.5 percent to 103.67 per Australian dollar and weakened by 0.4 percent versus the New Zealand dollar to 81.50.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan held its target lending rate at 0.5 percent this week, the lowest among major economies. Benchmark rates are 12 percent in South Africa, 7.25 percent in Australia and 8.25 percent in New Zealand. The Standard & Poor's 500 Index increased 1.2 percent yesterday.

`Cue From Stocks'

``Currency traders are likely to take their cue from the stock market,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Earnings season isn't as bad as many had feared. There will be some pressure on the yen to weaken.''

The yen may decline to 107 per dollar today, Ishikawa forecast.

Profit at JPMorgan, the largest U.S. bank by market value, fell 52 percent on mortgage-related writedowns and costs from the takeover of Bear Stearns Cos. Second-quarter net income of 54 cents a share compared with expectations for 44 cents in a Bloomberg survey of analysts. Wells Fargo & Co., the second- biggest U.S. mortgage lender, on July 16 announced profit that beat analyst estimates. Merrill Lynch & Co., the third-biggest U.S. securities firm, fell after it yesterday reported a fourth straight quarterly loss.

The S&P index lost 3.8 percent in the seven trading days ended July 15, the day the dollar reached its worst level against the euro, on speculation a government plan to shore up Fannie Mae and Freddie Mac would fail to restore confidence in the two largest buyers of U.S. home loans.

More Confidence

``We were extremely bearish,'' said Alan Kabbani, senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``Now the market is taking some of that bearishness out and becoming a little more confident about the economy and the financial sector.''

The dollar may be weakened by a Wall Street Journal report that Freddie Mac might raise as much as $10 billion by selling new shares. The article cited unidentified people familiar with the situation.

The Dollar Index on the ICE market fell to 72.149, from 72.242 yesterday. It was at 72.096 at the end of last week.

``The Freddie Mac story will likely add to risks of a softer U.S. equity open,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender. ``And thus a softer U.S. dollar.''

Losses, Writedowns

Global banks and securities firms have reported losses and writedowns of $436 billion related to subprime loans to U.S. homeowners with poor credit, weighing on both stocks and the nation's currency this year.

Cheaper oil is still helping to support the greenback against the euro. Crude oil for August delivery is set for a record weekly drop in dollar terms, having lost more than $14 a barrel since July 11 in New York.

The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

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

Last Updated: July 18, 2008 06:55 EDT

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