By Stanley White and Ron Harui
April 13 (Bloomberg) -- The dollar slid to a two-year low versus the euro and fell against the yen on speculation government data today will show a widening U.S. trade deficit.
``The report may spark concern whether the U.S. will be able to attract foreign investment to finance the shortfall,'' said Yuji Saito, a senior currency dealer at Societe Generale SA in Tokyo. ``It's a factor for selling the dollar.''
The New York Board of Trade's Dollar Index, which measures its value against currencies of six trading partners, reached a two-year low after International Monetary Fund Managing Director Rodrigo de Rato yesterday said the currency has room to drop. It fell for a second day against the yen on speculation Group of Seven leaders will discuss the Japanese currency's weakness at a meeting in Washington.
The dollar dropped to $1.3508 per euro at 2 p.m. in Tokyo from $1.3482 late yesterday. It fell as low as $1.3524, the weakest since Jan. 3, 2005. Against the yen, it was at 118.85 from 119.16. The U.S. currency may fall to $1.3550 per euro and to 118.50 yen today, Saito said.
The dollar index traded as low as 82.161, the weakest since March 2005, taking losses this year to 1.7 percent.
``A decline in the dollar index reflects a sense of mounting crisis over the U.S. trade imbalance issue,'' said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo. ``With U.S. trade deficits with Asian countries widening, the index is likely to slide steadily.''
The dollar may fall to 118 yen by year-end, Fukui said.
The trade deficit rose to $60 billion in February from $59.1 billion the previous month, according to a Bloomberg News survey. The Commerce Department releases the report at 8:30 a.m. in Washington. China this week said its trade surplus almost doubled in the first quarter from a year earlier. The dollar has declined 1.2 percent versus the euro since March 30.
Yield Spreads
The euro got an added boost versus the dollar on speculation European interest rates will rise faster than those in the U.S.
European Central Bank President Jean-Claude Trichet yesterday said monetary policy remains ``accommodative'' after the central bank kept rates at 3.75 percent.
Federal Reserve officials concluded last month that while additional rate increases may be necessary, uncertainty about the economy means that isn't the only option, according to minutes released April 11. The Fed's benchmark rate is 5.25 percent.
The spread on 10-year Treasury yields over German government debt of the same maturity narrowed to 0.5525 percentage point today, the lowest in seven weeks.
``U.S. interest rates may be higher than those in Europe, but we can expect spreads will continue to narrow,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``This will benefit the euro.''
The common European currency may rise to $1.3670 in the next few months, he said.
Investment Flows
The euro may rise to a record 165 yen in the next three months on speculation a strengthening economy and further increases will attract more investment in European assets, said Osamu Takashima at Bank of Tokyo-Mitsubishi UFJ Ltd. He raised his forecast from a January call for 163.
Government bond yields rose to the highest in almost five years. The Euro Stoxx 50, a measure for the 13 nations sharing the euro, has gained 3.9 percent this year.
``The inflow of foreign funds into European bonds is quite steady, while investors are beginning to pump more money into stocks,'' Takashima, chief analyst of the global markets sales and trading division at Japan's largest bank, said in an interview today. ``This will keep the euro strong.''
G-7 Meeting
The yen gained against the dollar and halted a three-day decline against the euro after Trichet said the currency doesn't reflect the strength of the Japanese economy. It is the worst performing of the 16 most-actively traded currencies over the past month as investors bought higher-yielding assets with funds borrowed in Japan, a strategy known as the carry trade.
``The yen will be supported through today,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``The yen strengthened on the back of Trichet's comments, which were clearly made ahead of the G-7. It's no surprise Europeans are starting to feel conscious about the strength of the euro.''
The yen traded at 160.71 against the euro from 160.65 late in New York yesterday, and reached a record low 160.87. The currency headed for a sixth weekly decline.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net .
Last Updated: April 13, 2007 01:03 EDT
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