Dollar Heads for Weekly Gain as Trichet Says `No Bias' on Rate

By Stanley White and Kosuke Goto

July 4 (Bloomberg) -- The dollar headed for a weekly gain versus the euro for the first time since mid-June on speculation the interest-rate differential that favors the 15-nation currency will stop widening.

The euro traded near a one-week low against the dollar after European Central Bank President Jean-Claude Trichet said he has ``no bias'' to increase the refinancing rate again after lifting borrowing costs yesterday. The yen headed for weekly declines versus the Australian dollar and the South African rand as Trichet's comments bolstered purchases of higher-yielding assets funded in the Japanese currency.

``The immediate reaction was to sell euros and buy dollars,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``The market was looking for a hawkish ECB and it was disappointed.''

The dollar touched a one-week high of $1.5675 per euro and traded at $1.5716 at 1:50 p.m. in Tokyo, from $1.5703 yesterday. The euro has fallen 0.5 percent this week. The dollar was at 106.75 yen, little changed from yesterday and up 0.6 percent from a week ago. The euro bought 167.78 yen, from 167.58 last week.

The yen declined 0.7 percent in the five days to 102.73 per Australian dollar. It also fell 2.6 percent to 13.7650 against the South African rand. In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency moves erase those profits.

Yield Spread

Japan's benchmark borrowing cost of 0.5 percent compares with 7.25 percent in Australia and 12 percent in South Africa. The ECB boosted its benchmark rate by a quarter-percentage point to 4.25 percent yesterday, the first increase in a year.

The difference in yield between two-year German bunds and similar-maturity Treasury notes narrowed to 1.91 percentage points compared with 2.05 percentage points on July 2, which was the widest since June 6.

The ECB's interest-rate increase will help the central bank bring the inflation rate back below 2 percent, Trichet said at a press conference in Frankfurt yesterday. Economic growth may slow to 1.5 percent next year from 1.8 percent this year and 2.6 percent in 2007, according to the ECB.

Neutral Stance

``Trichet has confirmed that the central bank has shifted back to a more neutral stance,'' BNP Paribas SA strategists led by Hans-Guenter Redeker wrote in a research note dated yesterday. ``We believe that interest rates are now on hold, suggesting that further downward pressure in the euro is now likely.''

The euro may fall to $1.53 on a break below $1.5650, according to BNP.

Traders reduced bets the ECB will increase rates further this year. The implied rate on the December Euribor futures contract fell 0.13 percentage point to 5.15 percent yesterday.

The euro may come under more pressure to decline on speculation investors will repatriate earnings from European government debt payments.

The euro-zone region will pay 43 billion euros ($67.6 billion) in coupon and principal on government debt today, including Finland's bond redemption totaling 7 billion euros, said Yuji Saito at Societe Generale SA in Tokyo.

``More than a few investors are trying to repatriate redemption payments on euro-zone bonds this week, taking advantage of any rally in the euro,'' said Saito, head of foreign-exchange sales at the Tokyo unit of France's second- largest bank by market value.

U.S. Rates

Strength in the dollar may prove short-lived should economic data start to discount the prospect of a rate increase by the Federal Reserve this year, Junya Tanase, a currency strategist in Tokyo at JPMorgan Chase & Co., the third-largest U.S. bank, said in an interview with Bloomberg Television.

``Should weak numbers continue to come out, that would reduce expectations for a rate hike and push down the dollar,'' Tanase said.

The U.S. currency may move between $1.56 and $1.59 a euro, and 104.50 yen and 107.50 yen next week, he said.

Futures on the Chicago Board of Trade yesterday showed an 81 percent chance the Fed will increase its target rate for overnight lending between banks by at least quarter-percentage point by year-end compared with 88 percent odds a week ago.

The greenback dropped 1.2 percent against the euro last week, a second weekly loss, after the Fed gave no indication in its June 25 statement that it will start reversing the most aggressive series of cuts in two decades.

Candle Chart

The dollar may advance to 107.70 yen, according to charts traders watch to predict price movements, said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp., the second-largest U.S. bank.

A so-called candle chart, that displays a currency's high, low, open and close for each day, indicated traders became bullish on the dollar, said Tokyo-based Fujii. The upside target of 107.70 was on its 200-day moving average, she said.

``The dollar-yen's short-term technical momentum is bullish,'' Fujii said.

The candle chart on July 2 and yesterday showed a so-called ``bullish engulfing pattern,'' a formation that shows the buying pressure exceeded selling pressure, reversing the dollar's bearish-trend, she said.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net