Dec. 18 (Bloomberg) -- The dollar traded near a 13-year low versus the yen and at the weakest level against the euro since September as the Federal Reserve’s near-zero interest rate policy reduces the appeal of holding U.S. assets.

The greenback also slid to a two-month low against the Australian dollar as longer-term Treasury yields fell and U.S. stocks declined on speculation the Fed has few tools left to combat a recession. Investors including hedge funds reversed bets the dollar will appreciate to minimize losses as the end of the year approached, traders said.

 

“The next step is for the Fed to start buying Treasuries, which will depress yields further and lead the dollar lower,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan’s largest brokerage. “The U.S. stock market shows few signs of life. I don’t think people are waiting to buy the dollar on the cheap.”

The dollar was quoted at 87.35 yen as of 8:14 a.m. in Tokyo from 87.24 yen yesterday, when it fell to 87.14 yen, the lowest level since July 1995. The U.S. currency traded at $1.4417 per euro from $1.4419 yesterday, when it reached a three-month low of $1.4437. The Australian dollar rose to a two-month high of 70.79 U.S. cents before trading at 70.64 U.S. cents from 70.39 U.S. cents. The euro was little changed at 125.91 yen. The dollar may fall to 85 yen next week, Amikura said.

 

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 2.2 percent to 78.908 yesterday. The dollar has given back about half of a rally in which it advanced 24 percent from a low of 71.314 on July 15 to 88.463 on Nov. 21.

“This is a very much a panic exodus from the dollar,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The primary reason is the Fed’s embrace of quantitative easing, in which they start printing dollars and start flooding the market with U.S. assets.”

The yield on 10-year Treasuries fell nine basis points, or 0.09 percentage point, to 2.17 percent yesterday. It touched 2.0711 percent, the lowest level since the Fed’s daily data on the securities began in 1962. The Standard & Poor’s 500 Index fell 1 percent yesterday, retreating from a five-week high.

The Fed lowered its target rate on Dec. 16 to a range of zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The central bank reiterated plans to buy agency debt and mortgage-backed securities and said it will study buying Treasuries.

The federal budget deficit widened last month to $164.4 billion compared with a gap of $98.2 billion in November a year earlier, the Treasury Department reported last week.

 

Yen’s Gain

The U.S. currency depreciated 22 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.

A dollar turnaround could come as early as the first quarter of next year as other central banks lower their interest rates, according to Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

 

BOJ Meeting

There is a 54 percent chance BOJ policy makers will lower borrowing costs from 0.3 percent at a two-day meeting starting today, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

 “I am not going to predetermine that measures should or shouldn’t be used,” Bank of Japan Governor Masaaki Shirakawa said on Dec. 16, when asked whether policy makers would consider reintroducing the 2001-2006 policy of pumping cash into the economy while holding borrowing costs near zero. The central bank will implement policy “appropriately,” he said.

 “The Fed remains ahead of the curve or more aggressive than most central banks with what it’s doing with its monetary policy,” said Bennenbroek, who forecast the euro will reach $1.45 and possibly $1.50 against the dollar. “Given how severe conditions are, a lot of other central banks are also very rapidly moving their interest rates down toward zero.”