Lehman offers products bullish on U.S. dollar, sees United States' woes likely affecting global economy

By Kenneth Lim

Boston, April 23 - Lehman Brothers Holdings Inc. launched a number of principal-protected notes linked to a bullish position on the U.S. dollar, betting that some currencies are peaking against the greenback.

Lehman bullish on dollar

Lehman Brothers plans to price 18-month zero-coupon notes linked to an equally weighted basket of the euro, the British pound, the Canadian dollar and the Swiss franc against the U.S. dollar. The basket level increases if the U.S. dollar appreciates against the component currencies.

If the basket finishes higher at maturity, the payout will be par plus at least 105% of the basket return. If the basket is less than or equal to its initial level at maturity, investors will receive par. The participation level will be set at pricing.

The bank also launched two-year zero-coupon notes linked to the same basket but with a participation level to be set at 115% to 130%. The final redemption amount will be calculated on the same principles as the 18-month product.

"It's a two-year 100% principal protected note with upside participation to appreciation of the U.S. dollar versus an equally weighted basket of currencies, comprising euro, Canadian dollar, Swiss franc and British pound," Lehman Brothers foreign exchange structuring senior vice president Michael Wilson said. "We believe the valuations of these four currencies are stretched against the dollar. The Canadian dollar at par, the euro at 1.6 and the pound at 2, these are all very attractive levels."

"We're offering a very attractive participation rate for investors," he added.

U.S. troubles may spread

The four currencies in the basket have appreciated considerably against the U.S. dollar over the past few months, and some investors could now take the view that the appreciation is peaking, Wilson said.

"Investors are increasingly questioning whether the dollar-bearish view is running out of steam, especially against these four currencies," he said.

Underlying the bullish view is the belief that relatively higher interest rates have helped to keep those four currencies at a high level. But those economies might not be able to sustain such high rates if the problems in the U.S. economy affect the rest of the world, Wilson said.

"We forecast these other countries responding to the global slowdown by lowering interest rates, at which point we expect the U.S. dollar to appreciate versus the basket," he said.

If the U.S. economy continues to falter but the rest of the global economy improves, the notes may not be in the money. But Wilson said a look back at the past few months suggests that America's troubles are not isolated.

"The risk to the trade is further bad news out of the U.S. and continuing U.S. dollar depreciation, with decoupling by the rest of the world," he said. "However we think that the decoupling argument is quite weak."

More bull-dollar notes

Lehman also offered a similar principal-protected note tied to the U.S. dollar rate against a basket of six currencies.

The zero-coupon notes mature in two years. The basket comprises a 57.6% weighting of the euro, a 13.6% weighting of the Japanese yen, an 11.9% weighting of the British pound, a 9.1% weighting of the Canadian dollar, a 4.2% weighting of the Swedish krona and a 3.6% weighting of the Swiss franc, all against the U.S. dollar. The basket level increases if the U.S. dollar appreciates against the component currencies.

The notes will return 1% for every 1% increase in the basket. If the basket ends flat or lower, investors will receive par.

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