Dollar Poised for Drop to `Final' Support, Bank of America Says

By Ye Xie

Nov. 21 (Bloomberg) -- The U.S. Dollar Index may fall at least 1.6 percent by year-end to a level that equates to $1.506 per euro, as the Federal Reserve will lower borrowing costs to support the economy, according to Bank of America Corp.

The Dollar Index, which gauges the value of the dollar against six major currencies, including the euro and yen, may reach the ``final'' technical support level of 73.92, the bank said in a research note today. The index, traded on ICE Futures U.S. in New York, has declined 10 percent this year and touched 74.95 today, the lowest since its creation in 1973.

``The overall outlook for the dollar remains bleak,'' Kamal Sharma, a currency strategist at Bank of America in London, said in an interview. ``If we don't hold onto that level, there's limited chance for a rebound in the dollar. That adds a technical argument to the fundamental argument for remaining bearish on the dollar.''

The dollar traded at $1.4827 per euro at 12:18 p.m. in New York, after earlier touching an all-time low of $1.4856. The U.S. currency fell 1.3 percent today to 108.55 yen, touching a more than two-year low. The Dollar Index, composed of the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, traded at 75.13.

The U.S. currency has lost 15 percent against the Canadian dollar this year and reached a 26-year low against the pound as the U.S. housing market slump and lower interest rates dimmed the allure of dollar-denominated assets.

Fed Forecast

The Fed cut its benchmark overnight interest rate by a half- percentage point to 4.5 percent on Sept. 18 and then by a quarter-point on Oct. 31. Futures contracts traded on the Chicago Board of Trade show a 90 percent chance the Fed will lower its rate to 4.25 percent when policy makers meet on Dec. 11.

The central bank will cut the rate a quarter-point at each of the next three meetings, to 3.75 percent by March 18, according to Bank of America. The bank, based in Charlotte, North Carolina, is the biggest U.S. bank by market capitalization.

U.S. 10-year note yields fell below 4 percent today for the first time since 2005. A government report yesterday showed homebuilding permits in the U.S. declined in October to their lowest level since 1993.

``We have ongoing stress in the financial system,'' said Sharma. ``The market continues to believe the Fed has to pull the trigger to cut rates. The fundamental argument for dollar weakness remains intact.''

The 73.92 level is derived from a 30-year trend line tracking the lows of the Dollar Index, according to Sharma.

``There are few significant support levels left,'' he said.

To contact the reporter on this story: Ye Xie in New York at

From: Bloomberg.com