Dollar Heads for Weekly Loss Versus Euro Before Confidence Data

By Kosuke Goto and Ye Xie

July 11 (Bloomberg) -- The dollar headed for a weekly decline against the euro on speculation a report today will show U.S. consumer confidence fell to the lowest level in 28 years, adding to concern the economic slowdown will be prolonged.

Signs of a weakening economy may deter the Federal Reserve from increasing borrowing costs this year. The currency traded near a 25-year low versus the Australian dollar after Treasury Secretary Henry Paulson told lawmakers markets will take ``additional time'' to stabilize Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans.

``The dollar is vulnerable,'' said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``The markets cannot dispel concerns over the U.S. financial sector and its negative impact on the economy.''

The dollar traded at $1.5784 per euro at 8:03 a.m. in Tokyo from $1.5788 in New York yesterday, when it fell to $1.5801, the weakest since July 3. It was at $1.5706 on July 4. The U.S. currency was at 107.08 yen from 107.07 yen yesterday and 106.80 yen a week ago. The euro traded at 169.02 yen from 169.05 yen yesterday and 167.73 yen a week earlier.

The U.S. currency may fall to $1.60 per euro in one month, Umemoto forecast.

Futures on the Chicago Board of Trade show 86 percent odds policy makers will keep borrowing costs unchanged at 2 percent at an Aug. 5 meeting, compared with 34 percent odds a month ago.

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in its target rate for overnight lending between banks to avert a recession. The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, fell to 72.493 and approached the lowest level since July 2.

Bernanke on Turmoil

Fed Chairman Ben S. Bernanke said in testimony before the House Financial Services Committee yesterday that more regulation over securities firms is needed now that ``financial turmoil is ongoing.'' Paulson reiterated a desire for a ``strong dollar,'' saying the currency should reflect the U.S. economy's ``long-term'' fundamentals.

``The general tenor and tone of comments from Bernanke and particularly Paulson have been sober,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut.

Fannie Mae fell 14 percent and Freddie Mac slumped 22 percent in New York trading yesterday after former St. Louis Fed President William Poole said in an interview the government may need to bail out the companies. Paulson said the regulator for Fannie and Freddie told him they have enough capital.

Crude Oil

Crude oil rose more than $5 a barrel to $141.69 a barrel at the close of floor trading on the New York Mercantile Exchange yesterday after Iran test-fired more missiles in the Persian Gulf. Prices are up 94 percent from a year ago, raising concern energy costs will reduce consumer spending.

The Reuters/University of Michigan preliminary index of consumer sentiment probably dropped to a 28-year low of 55.5 in July, from 56.4 the previous month, according to the median forecast of 60 economists surveyed by Bloomberg News. The report is due at 10 a.m. New York time.

``The U.S. dollar will come under pressure again,'' said Sophia Drossos, a currency strategist at Morgan Stanley in New York, in an interview on Bloomberg Radio. She expects the credit crisis to have ``an adverse feedback loop'' on the U.S. economy.

Intervention Risk

The risk of intervention in the foreign exchange markets by central banks in the U.S., Europe and Japan has increased to 30 percent, according to a probability model developed by Morgan Stanley.

The model quantifies an ``intervention checklist'' using data including five-year interest rate differentials, the deviation of real exchange rates from their five-year moving average, total dollar positioning and the four-week moving average of price changes in the euro versus the dollar and yen.

Aerospace executives told European Central Bank President Jean-Claude Trichet yesterday that the dollar's drop is of ``deep concern.''

European Aeronautic, Defence and Space Co. Chief Executive Officer Louis Gallois was among business leaders who met with Trichet in Frankfurt, according to a statement released by the Aerospace and Defense Industries Association of Europe. The dollar is the currency for airplane industry contracts worldwide.

European Weakness

The euro weakened against the dollar earlier yesterday after reports showed French and Italian industrial production dropped in May by more than analysts had forecast, raising concern European economic growth is slowing.

Output at French factories and utilities fell 2.6 percent from the previous month, the biggest decline since October 2005, the Paris-based statistics office said. Italian production declined 1.4 percent from April, almost three times the drop forecast by economists in a Bloomberg News survey.

``It's a consistent theme that globally industrial production has been weakening,'' said Andrew Busch, a currency strategist in Chicago at BMO Capital Markets, a unit of Bank of Montreal. ``It's really a race to the bottom. The U.S. is the first to get in trouble and may be the first to turn around.''

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net