Wednesday, May 7, 2008

Euro Falls to Eight-Week Low Against Dollar Before ECB Meeting

By Stanley White

May 8 (Bloomberg) -- The euro fell to an eight-week low against the dollar on speculation the European Central Bank will keep interest rates unchanged at a policy meeting today while signaling concern that economic growth is slowing.

The 15-nation currency declined for a second day after the Financial Times said the U.S. and Europe want to see the dollar rise, citing officials it didn't identify. The British pound traded near a 2 1/2-month low versus the dollar before today's meeting of the Bank of England and after an industry report yesterday showed U.K. consumer confidence fell.

``The euro is likely to face renewed pressure to go lower,'' said Masanobu Ishikawa, Tokyo-based general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Data from the euro-zone suggest the ECB can't delay cutting rates indefinitely. The pound is even more vulnerable.''

The euro traded at $1.5314 at 11:20 a.m. in Tokyo, from $1.5392 yesterday in New York. It earlier touched $1.5285, the lowest since March 11. It has lost 4.2 percent since April 22, when it reached a record high of $1.6019. The euro fell to 160.38 yen from 161.23 yesterday, after reaching 160.20 yen, the weakest since April 15. The pound bought $1.9530, near the lowest since Feb. 21. The dollar was at 104.71 yen from 104.73.

The New Zealand dollar fell to 77.38 U.S. cents from 78.15 cents after a government report showed the country's employers cut the most workers in 19 years. The Australian dollar pared losses to trade at 94.20 U.S. cents after the number of employed in the nation rose for a record 18th month.

Asian Currencies

The dollar rose to 1,040.90 South Korean won from 1,026.15 and advanced to 42.60 Philippine pesos from 42.435. It gained 0.9 percent against Malaysia's ringgit to 3.1941 and 0.5 percent against the Singapore dollar to S$1.3727.

The ECB and the Bank of England are forecast to maintain their lending targets at 4 percent and 5 percent, respectively, at meetings today, according to Bloomberg News surveys.

The euro's losses may be limited by a surge in the price of crude oil to a record $123.93 a barrel, Ishikawa said. Rising energy prices have pushed the inflation rate higher in Europe, delaying ECB interest-rate cuts. The euro versus the dollar has had a correlation of 0.96 with the price of crude in the past 12 months. A reading of 1 would mean they moved in lockstep.

The euro weakened versus the dollar after the European Union said retail sales in the countries that share the single currency declined 1.6 percent in March from a year earlier, the biggest drop since the data began in 1995.

Pound Falls

The pound declined on speculation the BOE will lower interest rates later this year as the economy slows. U.K. house prices had the first annual decline since 1996 last month, growth in service industries slowed to a five-year low and manufacturing weakened, reports showed this week.

``The slowdown shown in recent euro-zone data is starting to weigh on the euro,'' BNP Paribas SA analysts led by Hans- Guenter Redeker wrote in a research note yesterday. Any gains in the pound are ``likely to prove short lived and limited, providing a renewed selling opportunity.''

The euro may fall to $1.48 at the end of this year, while the pound may decline to $1.92, BNP Paribas forecast.

The euro also weakened against the dollar after the Financial Times said it had reached levels that were ``unhelpful'' to both the U.S. and Europe, citing senior U.S. and European officials.

The U.S. intended the April 11 statement from the Group of Seven finance ministers and central bankers to signal it doesn't want the dollar to decline further, and sees the dollar as having been sold excessively, the FT reported, citing an unidentified senior U.S. official.

Dollar Policy

Luxembourg Prime Minister Jean-Claude Juncker, who also heads the group of euro-area finance ministers, said May 2 he's still concerned about the level of the euro, even though it's declined from a record high. Treasury Secretary Henry Paulson reiterated on May 1 his support for a ``strong dollar'' policy.

``The euro is definitely falling on the back of this FT article,'' said Ray Attrill, director of foreign-exchange research at Forecast Ltd. in Sydney. ``The U.S. is basically worried that the dollar will overshoot on the downside. It will reinforce the trend we've seen the last few days so we'll see some more euro weakness.''

The euro may fall to $1.5275 today, he said.

The dollar's advance versus the euro has gained momentum since the Federal Reserve said rate reductions to date were ``substantial'' after lowering its target lending rate on April 30 by a quarter-percentage point to 2 percent, its seventh cut since September.

Productivity Rises

U.S. productivity rose at a 2.2 percent annual rate in the first quarter after a 1.8 percent gain in the prior three months, the Labor Department said yesterday in Washington. The median forecast of economists surveyed by Bloomberg News was for an advance of 1.5 percent.

Futures on the Chicago Board of Trade show an 88 percent chance the Fed will keep borrowing costs on hold at its June 25 meeting. The balance of bets is for a reduction of a quarter- percentage point.

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