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Dollar Falls on Speculation Fed Will Reduce Interest Rates By Bo Nielsen and Aaron PanAug. 21 (Bloomberg) -- The dollar fell against the euro and yen as tradersincreased bets the Federal Reserve will reduce its target rate forovernight lending between banks. The U.S. currency erased earlier gains before Federal Reserve Chairman BenS. Bernanke and Treasury Secretary Henry Paulson's meeting today withSenate Banking Committee Chairman Christopher Dodd to discuss ``ongoingturmoil'' in the markets.

Interest rate futures show traders see a 96percent chance the Fed will lower its target rate to 4.75 percent from5.25 percent by Sept. 18, up from 70 percent yesterday. ``The Fed must cut rates to keep the economy going,'' said Jason Schenker,an economist in Charlotte, North Carolina, at Wachovia Corp. ``Ifbusinesses are spooked and pull back from investing as a result of highercost of capital, then you will see jobs slow and the economy cool down.'' The dollar fell 0.14 percent to $1.3493 at 9:28 a.m. in New York.

The U.S.currency fell 0.44 percent to 114.37 yen. Schenker expects two Fed rate cuts to 4.75 percent by year- end comparedwith his forecast of none a few weeks ago. He predicts the dollarweakening to $1.4 versus the euro as the European Central Bank maintainsits key rate at 4 percent. The Fed on Aug. 17 reduced the rate it charges banks for direct loans by0.5 percentage point to 5.75 percent, the first cut in borrowing costsbetween scheduled meetings since 2001. The central bank dropped languageindicating a bias toward fighting inflation and highlighted a risingthreat to economic growth.

The euro slid briefly against the dollar earlier after a German reportshowed investor confidence dropped to an eight- month low in August,backing the case for the European Central Bank to delay raising interestrates. The ZEW Center for European Economic Research in Mannheim said its indexof investor and analyst expectations declined to minus 6.9, the lowestsince December, from 10.4 in the previous month. Economists expected adrop to minus 1.5, according to the median forecast of 36 economistssurveyed by Bloomberg News. ``If I could give advice to the ECB, it would be to keep rates stable,''said ZEW President Wolfgang Franz, who is also one of the five economicadvisers to the German government, said today. ``I think they should waituntil this financial market turbulence passes.'' Rising Volatility The yen climbed gained against all of the 16 most actively tradedcurrencies as rising exchange-rate volatility increased the risk of carrytrade purchases of assets with money borrowed in Japan. The yen fell 0.41percent against the euro, after rising as high as 153.52. Japan's currency rallied the most against the Australian dollar asinvestors reduced carry trades. The yield on two-year Treasury notes fellalmost 3 basis points, or 0.03 percentage point, to 4.6 percent today asthe widening credit crunch increased demand for government debt, while therisk of owning corporate bonds rose.

``It's still an environment where risk aversion favors the yen,'' saidMitul Kotecha, head of currency strategy in London at Calyon. ``There'sstill a good feed of bad news filtering into the market, which is leadingto a further deterioration of risk appetite. It's difficult to see thisending anytime soon.'' The pound fell against the dollar and euro on concern the credit-marketcrisis is spreading to the U.K., Europe's second- biggest economy. BOE Loan The Bank of England said today that it loaned 314 million pounds ($628million) from its emergency facility at 6.75 percent, one percentagehigher than the benchmark rate, for the first time since July 17. Odey Asset Management LLP, a London-based hedge fund, said profit fell 69percent, and hedge fund manager Solent Capital Partners LLP said it may beforced to sell assets after it was unable to borrow in thecommercial-paper market yesterday. China raised interest rates for the fourth time since March to cool theworld's fastest-growing major economy after inflation surged to a 10-yearhigh. The benchmark one-year lending rate will increase 0.18 percentage point to7.02 percent tomorrow, the People's Bank of China said on its Web site.The one-year deposit rate will rise 0.27 percentage point to 3.6 percent. The yuan traded at 7.5907 versus the dollar compared with 7.5901yesterday. To contact the reporters on this story: Bo Nielsen in New York atbnielsen4@bloomberg .net ; Aaron Pan in London at apan8@bloomberg. net . Last Updated: August 21, 2007 09:32 EDT ------------ --------- ------------------ --------- ------____________ _________ _________ _________ _________ _________ _
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