Jan. 6 (Bloomberg) -- The dollar fell to a record against the euro in London after Atlanta Federal Reserve President Jack Guynn yesterday suggested the central bank won't raise interest rates from a four-decade low soon. The economy may grow 4 percent this year and there is little sign of a ``significant'' increase in inflation that would lead to higher rates, Guynn told the Rotary Club of Atlanta. Belgian Finance Minister Didier Reynders said in an interview with Bloomberg News the euro's rise ``is not a problem.'' ``This gives the markets the green flag to keep on selling the dollar,'' said Adam Cole, a senior currency strategist in London at Credit Agricole Indosuez SA.
Against the euro, the dollar fell to $1.2753 at 11:44 a.m. in London from $1.2677 late yesterday in New York, according to EBS prices. It dropped to as low as $1.2762. The dollar may slide to $1.30 within a month, said Cole. The euro rose 20 percent against the dollar last year. Guynn's remarks were the second in two days from a Fed official to indicate the Fed isn't concerned about inflation and that monetary policy can remain ``accommodative.'' Fed Governor Ben S. Bernanke said on Sunday rates can stay low because prices aren't rising much and the labor market remains weak. Compared with the yen, the U.S. currency was little changed at 106.18 after the Bank of Japan sold yen to stem the Japanese currency's appreciation for a second day, said traders at banks that deal with the BOJ. ``We will act as needed to counter speculative movement,'' Zembei Mizoguchi, Japan's vice finance minister for international affairs, told reporters in Tokyo earlier today. ``There is a need for us to respond to this with determination.''
`Insulate Economy'
The central bank sold yen at about 7:10 a.m. London time after it rose to about 106.09, the strongest since September 2000, said the traders, who spoke on condition they not be further identified. ``If it wasn't for the Bank of Japan, dollar-yen would be something like 95,'' Steve Pearson, chief currency analyst in London at HBOS Treasury Services Plc, said in a televised interview with Bloomberg News. ``They're spending their money to try to insulate the economy from the worst effects of the bear market for the dollar.'' Demand for the dollar has waned as U.S. interest rates stay lower than in Europe, discouraging some international investors from buying debt sold to finance a record U.S. budget deficit.
Interest Rates
The Fed's benchmark rate, at a 45-year low of 1 percent, is half that of the European Central Bank. The yield on the 1 7/8 percent U.S. Treasury note maturing in December 2005, more sensitive than longer-maturity debt to changes in the central bank's rate, was 1.91 percent, compared with 2.55 percent for the German note of similar maturity. In other trading, the British pound rose to an 11-year high of $1.8225 against the dollar. The Bank of England, whose benchmark rate is 3.75 percent, last year became the first of the world's four largest central banks to raise rates since 2000. Guynn, who doesn't vote on rates this year, said the current Fed target rate is ``very accommodative.'' While the Fed will eventually have to consider raising it, ``I want to emphasize that I see little threat that inflation is poised to rise significantly.'' Consumer prices excluding food and energy fell 0.1 percent in November, the first decline in 21 years, a government report last month showed. From a year earlier, prices rose 1.1 percent. ``The weakness of the U.S. dollar is exactly what the Fed and the U.S. administration like and want to continue,'' said Peter Clay, currency strategist in Sydney at ABN Amro Holding NV. ``Anytime a Fed official comes out and says `time is on our side' regarding rates, it is going to weigh on the dollar.''
Currency Policy
U.S. Treasury Secretary John Snow told Bloomberg News last month the currency's drop had been ``orderly.'' While he and President George W. Bush regularly endorse a ``strong dollar'' they say they want markets to set exchange rates. The euro gain is ``a correct appreciation,'' Reynders said in an interview after a news conference in Brussels. ``We can have a strong euro with a strong economy.'' In the event the euro advances beyond $1.30, ECB officials may consider selling euros in a bid to prevent the currency's surge from eroding demand for exports, said Cole at Credit Agricole. ``Brutal exchange-rate fluctuations are bad for everyone,'' French Budget Minister Alain Lambert said on French radio station Europe 1. ``We're vigilant.''
Yen Selling
Any gain in the yen to beyond 106 per dollar may stall on speculation Japan will sell its currency to prevent a stronger yen from undermining the nation's economic recovery. ``It's just a matter of time before the yen gains to above 106,'' said Tohru Sasaki, a currency strategist in Tokyo with J.P. Morgan Chase & Co., and a former BOJ official. ``That will probably prompt Japanese authorities to step up efforts to protect 105.'' Japan spent a record 20.1 trillion yen ($189 billion) last year through Dec. 26 to stem the yen's rise because a stronger local currency erodes the value of overseas sales of exporters when earnings are converted into yen. The yen may gain beyond 106 within two days, before trading at about 105.50 over the following few weeks, Sasaki said. A further strengthening of the yen will cause Japan's economy to suffer, according to Hiroshi Okuda, head of Japan's largest business lobby.
``At 105 yen to the dollar or more, Japan's economy will find it hard to cope,'' Okuda, chairman of the Japan Business Federation, said at a press conference in Tokyo. Okuda is also chairman of Toyota Motor Corp., the nation's largest automaker.
Services Industries
The euro remained near a record against the dollar even as European services, which make up more than half the region's economy expanded less than expected in December. The index, based on a survey of 2,000 companies for Group Plc, slipped to 56.6 from November's 57.5. The median forecast of economists surveyed by Bloomberg News was for a gain to 58. A reading above 50 indicates expansion. Investors today will look to a report on the U.S. services industry, slated for release at 3:00 p.m. London time. The measure of retail, financial services, construction and other non-manufacturing businesses may have climbed to 61 from 60.1 in November, based on the median estimate of 46 economists surveyed by Bloomberg News. Readings greater than 50 indicate that more companies reported business growing than shrinking.//www.bloomberg.com