Dollar Heads for Biggest Annual Drop Against Yen in Two Decades

The dollar was set to complete its biggest annual decline against the yen in more than two decades on signs the U.S. economy is sinking deeper into recession.

The euro was poised for its best year against the British pound since its 1999 debut on speculation the Bank of England will keep its main lending rate lower than that of the European Central Bank. The Australian and New Zealand dollars had record slides versus the U.S. currency and the yen as a global economic slump dragged down prices of commodities the nations export and curbed demand for higher-yielding assets.

“The risks are still heavily weighted to the downside for the dollar-yen,” said Lee Hardman, a London-based currency strategist at Tokyo-Mitsubishi. “The threat of a long slowdown in the U.S. and the fact the Fed has effectively dragged interest rates to zero will continue to undermine the dollar.”

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The dollar traded at 90.24 yen as of 10:30 a.m. in London, from 90.34 yesterday in New York. It has fallen 19 percent this year, the most since 1987. The currency dropped to $1.4071 per euro from $1.4057, paring its 2008 gain to 3.5 percent.

The U.S. currency may weaken to 80 yen and strengthen to $1.30 per euro in the first half of 2009, Hardman said. His forecast compares with median estimates of 100 yen and $1.26 per euro in a Bloomberg News survey of analysts. Currency movements may be exaggerated today because of the New Year’s holiday, he said.

The euro declined to 97.03 British pence from 97.57 pence yesterday, when it reached a record 98.03 pence. It was little changed at 126.96 yen from yesterday.

The yen was the best performer of 2008 among the world’s 16 most-active currencies against the dollar, while the pound was the worst, sliding 27 percent.

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