(Recasts, adds comment, updates prices)
NEW YORK, Jan 15 (Reuters) - The dollar on Tuesday dropped
to its lowest against the yen since June 2005 after U.S. retail
sales data provided more evidence an economic slowdown was
spreading to the consumer.
The drop in retail sales prompted some investors to reduce
risky positions and unwind carry trades, in which they borrow
in a low-yielding currency such as the yen to buy high-yielding
currencies such as the Australian dollar.
U.S. retail sales fell 0.4 percent last month while markets
were expecting no change from November. For more details, click
[].
Economic "growth is falling off a cliff and inflation is
still in the background," said Ron Simpson, director of
currency research at Action Economics in Tampa, Florida. "There
is a flight to safety with some unwind of carry trades and high
yielders getting hurt."
Against the yen, the dollar fell 1.3 percent to 106.79 yen
<JPY=>, after dropping as low as 106.61, according to Reuters
data. The Australian dollar fell 0.9 percent against the dollar
to US$0.8914, well off the day's high of US$0.9018.
The euro was last little changed against the dollar at
$1.4859 <EUR=>, though it was off the day's high of $1.4922.
Euro/yen <EURJPY=> fell to a four-month low of 158.54 before
recovering some ground to trade at 158.70, down 1.3 percent.
Andrew Busch, a global foreign exchange strategist with the
Bank of Montreal in Chicago said in a note to clients the loss
of spending momentum highlights a growing risk that the economy
would contract in the first quarter.
To offset that risk, financial markets expect the Federal
Reserve to cut benchmark overnight interest rates by at least a
half percentage point when its monetary policy committee next
meets on Jan. 29-30. Lower rates reduce the attractiveness of
dollar-denominated securities and demand for the greenback.
"These are definitely dollar-negative figures especially
retail sales," said Omer Esiner, market analyst, Ruesch
International in Washington. "The report raises concerns about
the health of consumer spending and increases the likelihood
that the U.S. may slip into recession. That, in turn, increases
the chances of aggressive interest rate cuts."
A separate report showed U.S. producer prices declined
unexpectedly by 0.1 percent in December after a sharp drop in
fuel prices, government data showed on Tuesday, but core
inflation at the producers level rose by 0.2 percent as
projected. [].
CITI WRITEDOWNS
The dollar had earlier pared losses against the yen after
Citigroup Inc <C.N> announced smaller-than-expected
write-downs, slightly easing concerns about the U.S. economy
and boosting investors' risk appetite.
The largest U.S. bank announced write-downs of $18.1
billion in the fourth quarter, slightly below press reports
that had suggested write-downs of as much as $20 billion.
The fact that the news was not as bad as some had feared
led investors to pare back short dollar positions and move out
of the low-yielding, safe-haven yen. However, the reaction was
relatively muted and short-lived.
"It's a case of buy the rumor, sell the fact, 18 yards
(billion) of losses is a big number but the market is happy to
have the bad news out of the way," said Geoff Kendrick,
currency strategist at Westpac in London.
"The market is still worried that the Fed is going to cut
aggressively ... which will lead to more dollar weakness," he
added.
Citigroup is the first big bank this week to report
fourth-quarter earnings and the spotlight will now shift to
others, including JP Morgan on Wednesday. Investors are looking
to see how much the credit crisis is damaging banks' bottom
lines and increasing the risk of a recession.
(Reporting by Nick Olivari, additional reporting by Gertrude
Chavez-Dreyfuss in New York and Simon Falush in London; Editing
by Tom Hals)
