Dollar Falls to Two-Year Low Versus Yen as Retail Sales Decline

Jan. 15 -- The dollar approached a record low versus the euro and touched the weakest since 2005 against the yen after U.S. retail sales fell in December, bolstering speculation the economy is headed for recession.

Traders sold the dollar as the data boosted bets the Federal Reserve will cut benchmark borrowing costs as much as 0.75 percentage-point this month to sustain economic growth. The Fed's target is currently 4.25 percent. The yen rose against all 16 most-actively traded currencies on concern that dimming demand from the U.S., Japan's biggest export market, will reduce Japanese investors' appetite for overseas purchases.

``The dollar is in trouble,'' said David Mozina, a senior currency strategist at Lehman Brothers Holdings Inc. in New York. ``The continued implosion of interest-rate support is pressuring the dollar.''

The dollar weakened to $1.4920 per euro at 9:16 a.m. in New York, from $1.4869 yesterday, and came within a cent of its record low of $1.4967 reached in November. The dollar dropped to 106.70 yen, from 108.16 yen yesterday, to the lowest since June 2005.

The dollar's decline began earlier as Citigroup Inc. posted a record quarterly loss, raising concern that financial companies' losses from home-loan defaults will mount.

Retail sales fell 0.4 percent last month, after increasing a revised 1 percent in November, the Commerce Department said in Washington. The median forecast in a Bloomberg survey was for sales to be flat. Producer prices increased 6.3 percent in December from a year earlier, after a 7.2 percent pace in November, the government said separately.

Greenspan's Call

The U.S. may already have entered a recession, or will do so shortly, former Fed chairman Alan Greenspan told the Wall Street Journal in an interview published today. He cited purchasing managers' and unemployment data, saying ``the symptoms are clearly there,'' the newspaper reported.

Fed funds futures contracts on the Chicago Board of Trade show a 100 percent likelihood the Fed will cut its target rate for overnight bank loans to at least 3.75 percent this month. The chance of a decrease to 3.5 percent is 54 percent, compared with zero probability a week ago. The Fed is next scheduled to announce a decision on rates on Jan. 30.

The Fed may lower rates before Jan. 30, though Lehman's base case is for a half-point cut at the meeting, Mozina said.

The European Central Bank's benchmark rate is currently 4 percent.

Yen Advance

The yen's biggest advance versus major currencies was against the Brazilian real. The most volatile exchange rates this decade are prompting traders to buy yen to repay loans in the Japanese currency that were then used to purchase higher- yielding assets.

The Japanese currency advanced 1.6 percent to 61.33 yen per Brazilian real, one of the favorite currencies of carry-trade investors because of that nation's 11.25 percent benchmark interest rate. Japan's benchmark is 0.5 percent.

``People are more comfortable with driving the dollar lower against the yen'' than the euro, said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. Today's report ``plays to those fears that U.S. consumer spending is capitulating,'' which will hurt global economic growth.

The dollar may fall to 104 yen in one month, said Ruskin.

At 10.6 percent, volatility in major currencies is a third higher than its average over the past year, according to JPMorgan Chase & Co.'s G7 Volatility index. The measure reached 13.4 percent in August, the highest since 1999 and double the record low set two months earlier.

The British pound rebounded from near a record low versus the euro after a government report showed U.K. inflation held above the Bank of England's 2 percent target for a third month in December, reducing pressure on policy makers to cut rates. The pound rose 0.6 percent to 75.55 pence per euro, from 76.01 pence yesterday and a record low of 76.14 pence earlier.

U.S. Retail Sales Unexpectedly Declined in December (Update2)

Jan. 15 -- Sales at U.S. retailers unexpectedly fell in December, capping the weakest year since 2002.

Sales dropped 0.4 percent, the first decline since June, following a revised 1 percent gain in November, the Commerce Department said today in Washington. Purchases excluding automobiles also decreased 0.4 percent.

Treasury notes rose and stock-index futures dropped as the figures underscored Federal Reserve Chairman Ben S. Bernanke's concern that risks to growth are intensifying. A sustained slump in consumer spending brought on by falling property values and rising unemployment would mean the end of the six-year expansion, economists say.

``Consumer spending slowed down pretty dramatically'' in the fourth quarter, said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who correctly forecast the drop in sales. ``We are kind of flying very close to a stall speed.''

Economists forecast retail sales would be unchanged, according to the median of 74 estimates. Projections ranged from a decline of 0.8 percent to a gain of 0.5 percent.

Yields on benchmark 10-year notes dropped to 3.72 percent at 8:55 a.m. in New York, from 3.77 percent late yesterday. Futures contracts on the Standard & Poor's 500 stock index expiring in March declined 1.1 percent to 1,404.40.

Producer Prices

Producer prices in the U.S. also dropped in December, against economists' forecasts for an increase. Wholesale prices fell 0.1 percent after a 3.2 percent surge in November that was the biggest in 34 years, a Labor Department report showed.

For all of 2007, retailers posted a 4.2 percent sales increase, the smallest in five years. Purchases rose 5.9 percent in 2006.

``Growth stalled out at the end of the fourth quarter and into the new year,'' Joshua Feinman, chief U.S. economist at Deutsche Asset Management in New York, said before the report. ``The economy will narrowly be able to avoid recession.''

Sales excluding automobiles were forecast to decrease 0.1 percent from the prior month, according to the survey median.

The drop in sales was led by a 2.9 percent decline at building-material stores, the biggest since February 2003, reflecting the slump in housing. Sales at clothing, electronics and sporting-goods stores were among those that also decreased.

Gas Stations

Purchases at service stations dropped 1.7 percent, which economists said reflected lower gasoline prices. The price of a gallon of regular gasoline in December averaged $3.01, down from $3.07 the previous month, according to AAA, a group representing motorists. Excluding gas, retail sales fell 0.2 percent.

Auto dealers saw a 0.4 percent decline in sales.

AutoNation Inc., the largest publicly traded U.S. car dealer, doesn't expect the nation's auto market to pull out of its slump until 2009, Chief Executive Officer Michael Jackson said from Fort Lauderdale, Florida.

The drop in housing and the slowing economy usually take ``30 to 40 months to work through,'' Jackson said in a Bloomberg Radio interview yesterday. ``So we've had declines in 2006, 2007 and 2008, but I'm feeling pretty good about 2009.''

Excluding autos, gasoline and building materials, the figures the government uses to calculate gross domestic product, sales increased 0.1 percent, following a 0.7 percent gain the month before. The government uses data from other sources to calculate the contribution from the three categories excluded.

Spending Outlook

Consumer spending, which accounts for more than two-thirds of the economy, is likely to cool rather than collapse in coming months as the housing slump worsens and hiring slows, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Spending will grow at an annual rate of 1.6 percent this quarter, down from an estimated 2.6 percent pace in the last three months of 2007, according to the median estimate of economists surveyed by Bloomberg News this month. Spending expanded at an average 3.5 percent pace per quarter over the past decade.

The continued gains, together with increasing exports, will help the economy avoid recession, economists said. Fed rate cuts will ensure a short downturn should one occur, they said.

Bernanke on Jan. 10 pledged ``substantive additional action'' to insure against ``downside risks'' to the economic expansion.

Investors are certain the Fed will lower the benchmark interest rate by at least a half percentage point following two days of meetings of Jan. 29-30.

Wal-Mart

Discount retailers are benefiting as Americans rein in spending. Wal-Mart Stores Inc., the world's largest retailer, said Jan. 10 that its December sales were within its forecast after it lured shoppers with price cuts on more holiday items.

Purchases at chain stores in November-December rose at the slowest pace in five years, according to the International Council of Shopping Centers.

An early Thanksgiving boosted holiday shopping in November at the expense of December sales, economists such as Peter Kretzmer of Bank of America Corp. said. Additionally, gift cards bought over the last two months won't be reflected in the sales figures until they're redeemed in January or later.

The biggest housing recession in 16 years is reverberating across the economy as access to credit tightens, consumer and corporate demand weaken and job growth slows. Unemployment rose to 5 percent in December, a 0.3 point jump from November and a highest in two years, according to Labor Department figures.

The magnitude of the gain from a recent 4.4 percent trough prompted economists including Jan Hatzius of Goldman Sachs Group Inc. to warn that the economy may have already entered a recession.

``Recession has now arrived, or will very shortly,'' Hatzius wrote in a note to clients last week.