June 13 (Bloomberg) -- The dollar headed for its first losing week in three against the euro on growing speculation the Federal Reserve will lower interest rates, reducing yields on U.S. assets such as bonds and bank deposits. The dollar was at $1.1765 per euro at 1:29 p.m. in Tokyo, from $1.1766 late yesterday in New York. It was also at 117.65 yen, from 117.69 yen. The dollar was headed for its third day of losses against the euro and for the week was down 0.6 percent. It was 0.8 percent lower against the yen on the week. All 22 bond-trading firms that deal directly with the Fed expect at least a quarter-percentage-point rate cut at policy makers' June 24-25 meeting, a Bloomberg survey found this week, with eight of them expecting a half-point reduction. Prices paid to U.S. producers slipped in May for a second month, a report today will probably show.
``The U.S. economy isn't growing fast enough to avert the Fed's deflation'' scenario, Greg Gibbs, currency strategist in Sydney with Royal Bank of Canada, told Bloomberg News in a television interview. As a result, ``the euro is going to move up quite significantly against the dollar.'' Gibbs, who predicts the Fed will cut its 1.25 percent benchmark interest rate by 50 basis points, said the dollar may fall to $1.25 per euro by the end of the year. A basis point is 0.01 percentage point. Royal Bank is Canada's largest lender.
`Back Foot'
The producer price index, which measures amounts paid to factories, farmers and other producers, probably fell 0.2 percent after dropping 1.9 percent in April, based on the median of 66 forecasts in a Bloomberg News survey. ``The dollar's on its back foot,'' said Jake Moore, currency strategist in Tokyo at Barclays Capital Plc, the ninth-biggest trader in the daily $1.2 trillion foreign exchange market. Barclays expects the Fed to cut interest rates by 25 basis points. The dollar may fall to between $1.20 to $1.25 per euro in coming months, Moore said. Any decline in the dollar against the yen may be limited after Zembei Mizoguchi, Japan's vice finance minister for international affairs, signaled Japan will sell its currency to stem a six-month, 5 percent appreciation that threatens the country's exports.
``There is no reason for the yen to strengthen given the state of Japan's economy,'' Mizoguchi said. ``Japan will take steps as needed in response to currency moves.'' The Bank of Japan sold a record 3.98 trillion yen ($33.5 billion) in May to keep its currency from strengthening against the dollar. A stronger yen may help push Japan into recession for the fourth time in 12 years as it makes it more difficult for exporters such as Toyota Motor Corp. to compete with rivals overseas and reduces their revenue from outside Japan in yen terms. Annual operating profit at Toyota, Japan's biggest automaker, drops about $200 million for every 1 yen rise against the dollar.
Shiokawa
The yen may fall against the euro after Mizoguchi's boss, Finance Minister Masajuro Shiokawa signaled Japan wanted its currency to weaken against its European counterpart. ``We must closely watch the yen's moves against the euro,'' Shiokawa said. The yen was at 138.42 per euro, from 138.52, and has gained 1.8 percent since reaching a record low of 140.96 May 30. The number of people on jobless benefits in the U.S. rose to 3.8 million in the week ended May 31, the highest since April 1983, the Labor Department said yesterday. Initial filings for state unemployment benefits numbered 430,000 last week, more than the 425,00 level forecast by economists. The count has exceeded 400,000 every week since February. Interest-rate futures show traders increased bets the Fed will lower its target rate for overnight loans between banks by at least a quarter percentage point at its next meeting June 24-25. The yield on the June eurodollar futures contract, an indication of expectations for a three-month lending rate that has exceeded the Fed's target by an average 24 basis points over the last 10 years, declined by 2 basis points to 1.095 percent.
Goldman
The Federal Reserve's commitment to combat the threat of slowing inflation in the U.S. may lead to further declines in the dollar, which is down 24 percent against the euro in the past 12 months, Goldman, Sachs & Co. said yesterday. Goldman, the fifth-biggest trader in the currency market, according to Euromoney magazine, last week lowered its forecast for the U.S. dollar against the euro over the next three, six and 12 months. It expects the euro to buy $1.18 in three months, $1.24 in six months and $1.26 in 12 months. Its previous estimate for the euro was $1.12 in three months, $1.15 in six months and $1.22 in 12 months. Goldman forecasts the Fed will reduce its benchmark lending rate by at least a quarter percentage point to 1 percent at its June 25 meeting. Speculation of a reduction has mounted since Fed Chairman Alan Greenspan said a week ago the central bank was concerned about ``corrosive deflation,'' in which falling prices tend to reduce consumer spending as well as erode the profitability of corporations. In other trading, the dollar held at 1.3109 Swiss francs. The British pound rose to $1.6715 from $1.6686. //www.bloomberg.com