Dollar May Extend Gain Against Euro on Fed Rate Expectations

By Bo Nielsen


April 25 (Bloomberg) -- The dollar may extend its rally against the euro as traders increase speculation that the Federal Reserve will stop cutting interest rates.

The euro plummeted yesterday the most against the dollar since December after reports showed business confidence fell in Germany and France this month. The U.S. currency increased as orders for durable goods excluding transportation equipment increased more than forecast in March, indicating parts of the economy are weathering the housing slump.

``People are starting to believe that the Fed is near the end of its rate-cutting cycle,'' said Win Thin, a currency strategist at Brown Brothers Harriman & Co. in New York. ``Underlying fundamentals are definitely more dollar- supportive.''

The dollar traded at $1.5681 per euro at 6:03 a.m. in Tokyo, after increasing 1.3 percent yesterday. The 15-nation currency reached $1.6019 on April 22, the highest level since its 1999 debut. The dollar traded at 104.24 yen after rising 0.9 percent. The euro traded at 163.47 yen, following a 0.5 percent decline.

Futures on the Chicago Board of Trade showed yesterday an 18 percent chance the U.S. central bank will hold the target lending rate at 2.25 percent on April 30, compared with no chance a week ago. There's an 82 percent likelihood of a cut to 2 percent. The yield on the two-year Treasury note increased 0.19 percentage point to 2.38 percent on speculation the Fed is close to the end of its interest-rate reductions.

Swiss Franc

The Swiss franc fell yesterday against all of the major currencies as rising U.S. stocks persuaded investors to sell the currency to buy higher-yielding assets outside Switzerland. The Standard & Poor's 500 Index rose 0.6 percent.

Switzerland's target lending rate is 2.75 percent, one of the lowest among the major economies, making the franc a favored source of funding. The currency dropped 2 percent against the dollar to 1.0355 yesterday.

The euro weakened against the dollar yesterday as the Munich-based Ifo institute said its German business climate index, based on a survey of 7,000 executives, fell to 102.4 this month, from 104.8 in March. An index of sentiment among 4,000 French manufacturers slid to 106 from a revised 108, the Paris- based national statistics office said yesterday.

French President Nicolas Sarkozy said in a nationally televised interview yesterday on TF1 and France 2 that the euro has reached an ``incredible'' level against the dollar.

Euro and Oil

The euro versus the dollar has had a correlation of 0.96 with the price of crude oil over the past 12 months, according to data compiled by Bloomberg. A reading of 1 would mean they move in lockstep. Crude for June delivery rose to a record $119.90 on April 22 and dropped to $115.86 a barrel yesterday.

``The euro and energy prices are the two primary factors contributing to the breakdown in the Ifo,'' said Michael Malpede, a senior currency analyst in Chicago at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. ``The euro represents a pretty significant threat to the European economy.''

A 1 percentage point increase in the euro's real exchange rate reduces growth in the region's exports by 0.6 percent within a year, according to a note this month from Deutsche Bank AG, the biggest currency trader. The 15-nation euro has risen 9.8 percent over the past year against a basket of currencies, according to an index from the Bank of England that's adjusted for inflation.

Trichet on Economy

European Central Bank President Jean-Claude Trichet told reporters at a conference in Frankfurt yesterday that the bank is concerned that the euro's recent surge to a record against the dollar may hurt Europe's economy. The euro has appreciated 7 percent this year against the dollar on speculation inflation will discourage the ECB from lowering borrowing costs from a six-year high of 4 percent.

The dollar extended its gain versus the euro yesterday as the Commerce Department said bookings increased 1.5 percent for goods meant to last several years, outside of cars and planes, following a 2.1 percent decline for February. Total orders fell 0.3 percent, restrained by a drop in defense-related hardware.

The Labor Department reported that the number of Americans filing first-time claims for unemployment benefits unexpectedly fell last week to a two-month low, a sign some companies have put firing plans on hold.

The euro may weaken to $1.53 after breaking below $1.5825, wrote Goldman Sachs Group Inc. analyst Kevin Edgeley in a note to clients yesterday.