Dollar Falls as GDP Trails Forecast, Jobless Claims Increase

By Ye Xie and Kim-Mai Cutler

July 31 (Bloomberg) -- The dollar fell for the first time in three days against the euro as reports showed the U.S. economy grew less than forecast in the second quarter and initial jobless claims rose last week to a five-year high.

The euro advanced earlier against the dollar as European inflation accelerated to the fastest pace in 16 years. The pound dropped against the euro after reports showed British consumer confidence declined this month to a record low and house prices fell the most in almost two decades.

``The economic backdrop is far less robust than people thought,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``Today's numbers provide a platform to send the euro-dollar to new highs.''

The dollar dropped 0.4 percent to $1.5641 per euro at 10:33 a.m. in New York, from $1.5576 yesterday. The U.S. currency declined to the record low of $1.6038 on July 15. The euro increased 0.2 percent to 168.71 yen, from 168.41. The U.S. currency dropped 0.3 percent to 107.85 yen, from 108.13.

Today's decline pared the greenback's gain versus the euro this month to 0.8 percent. The dollar has advanced 1.6 percent against the yen, while the euro has gained 0.9 percent versus Japan's currency.

Sterling declined 0.2 pence to 78.73 pence per euro today after the London-based market-research firm GfK NOP said its index of consumer confidence fell to the lowest since the data began in 1974. The average value of a home dropped 8.1 percent from a year earlier, the biggest decline since at least 1991, said Nationwide Building Society, Britain's fourth-biggest mortgage lender.

Fed Rate Outlook

Futures contracts on the Chicago Board of Trade showed a 32 percent chance of the Fed raising its 2 percent target rate for overnight loans between banks by at least a quarter-percentage point by Sept. 16, down from 38 percent odds yesterday. Most traders expect policy makers to keep borrowing costs unchanged when they next meet Aug. 5.

U.S. gross domestic product increased at an annual rate of 1.9 percent in the second quarter after revised 0.9 percent growth in the first three months of the year, the Commerce Department reported today. The median forecast of 79 economists surveyed by Bloomberg News was for an advance of 2.3 percent.

Initial jobless claims rose to 448,000 in the week ended July 26, from a revised 404,000 the prior week, the Labor Department said. Economists in a Bloomberg survey had forecast a drop in claims. The total number of initial filings last week was the highest since April 2003.

Company Hiring

The U.S. currency touched a one-month high against the euro yesterday after a private report showed companies unexpectedly added jobs this month.

``The dollar's rally was built on a shaky foundation,'' said Stephen Malyon, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``Today's numbers just highlighted there's more downside risk to growth. The jump in jobless claims puts a brake on the dollar's rally.''

Non-farm payrolls dropped by 75,000 this month following a decline of 62,000 in June, according to the median forecast 0f 79 economists surveyed by Bloomberg News. The Labor Department's report, which includes government hiring, is due tomorrow.

The euro strengthened versus the dollar as the European Union statistics office reported that the euro zone's inflation rate rose to 4.1 percent this month, the biggest increase since April 1992. The European Central Bank raised its main refinancing rate to 4.25 percent on July 3, the highest level since 2001.

European Inflation

``We're going to see inflation moving further to the upside,'' said Jeremy Stretch, a senior strategist in London at Rabobank International, the third-largest Dutch bank. ``That might just lead the market to think that even with the downturn in economic data, the ECB might turn toward tighter monetary policy. That's providing a little support for the euro.''

South Africa's rand rose as much as 0.9 percent to 7.3291 versus the dollar, the strongest since Feb. 4, after a report showed the country's trade deficit unexpectedly narrowed in June. The rand has increased 6.2 percent this month for the best performance among the world's major currencies.

Turkey's lira advanced to a six-month high after the Constitutional Court rejected yesterday a call by prosecutors to ban the party of Prime Minister Recep Tayyip Erdogan, which is seeking to introduce Islamic law in secular Turkey. The lira climbed as much as 2.4 percent to 1.1555 per dollar, its strongest since Jan. 15. It has gained 5.4 percent versus the dollar this month.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.