Dollar Rises to One-Week High as G-8 Meets, German Output Falls

By Ye Xie and Agnes Lovasz

July 7 (Bloomberg) -- The dollar rose to the highest level against the euro in more than a week as leaders of the Group of Eight nations convened in Japan and a report showed German industrial production unexpectedly fell in May.

The yen weakened against the euro and the dollar as global stocks advanced on retreating oil prices, reviving demand for higher-yielding assets. President George W. Bush, in Japan for the G-8 summit, reiterated support yesterday for a ``strong'' U.S. currency.



``With the G-8 meeting in the background, the near-term sentiment of the dollar is improving,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``They prefer a strong dollar.''

The dollar increased 0.3 percent to $1.5663 per euro at 11:26 a.m. in New York, from $1.5706 on July 4. It touched $1.5611, the strongest level since June 25. The yen dropped 0.7 percent to 107.54 per dollar, from 106.80. Japan's currency fell 0.4 percent to 168.43 versus the euro, from 167.73.

South Korea's won rose against all of its major counterparts after the government pledged ``stern action'' to stabilize the local currency. The won climbed 0.7 percent to 1,042.90 per dollar, from 1,050.35 on July 4.

The dollar strengthened versus the euro on speculation U.S. officials will try to stem gains in oil prices as the G-8 summit gets under way in Japan. Leaders from Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S. are meeting for three days. Central bankers aren't attending the meeting.

Bush on Dollar

Bush said yesterday on the first day of his five-day trip to Japan that the U.S. will continue to pursue a strong dollar.

``The U.S. believes in a strong-dollar policy,'' he said at a news conference with Japanese Prime Minister Yasuo Fukuda in Tokyo. The U.S. economy remains fundamentally strong even as growth has slowed, Bush said.

The dollar fell 0.7 percent against the euro on June 16 after Group of Eight finance ministers stopped short of making a joint comment on currencies, a practice they follow when central bankers are absent.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, rose as much as 0.6 percent to 73.151, the highest level since June 24.

The U.S. currency also appreciated as crude oil fell after Iran's Foreign Minister Manouchehr Mottaki expressed confidence in talks with Western governments on the country's nuclear program. Organization of Petroleum Exporting Countries President Chakib Khelil said yesterday record oil prices are more related to the dollar exchange rate than supply.

Crude Oil Falls

Crude oil for August delivery fell 2.4 percent to $141.83 a barrel on the New York Mercantile Exchange. Oil reached a record $145.85 a barrel on July 3.

Federal Reserve Bank of San Francisco President Janet Yellen said today in San Diego that the central bank ``will not allow a wage-price spiral to develop'' and that U.S. economic growth will ``pick up'' next year.

The euro dropped against the dollar as German industrial production unexpectedly dropped 2.4 percent in May, its third straight decline, prompting traders to pare bets the European Central Bank will raise the main refinancing rate for a second time this year.

``We do see the euro weaker,'' said Stuart Bennett, a senior European strategist at Calyon, the investment-banking unit of Credit Agricole SA, France's second-biggest lender. ``We are not relaxed about the growth outlook, and it's weaker than the ECB is accepting. Even though we suspect inflation means that they might have to hike again, the growth dynamics for Europe are pointing toward a weaker euro.''

The euro will fall to a range of $1.43 to $1.45 by the end of the year, Bennett predicted.

Trichet's `No Bias'

The 15-nation currency declined 0.6 percent last week after ECB President Jean-Claude Trichet said he had ``no bias'' on borrowing costs following the decision to raise the main refinancing rate by a quarter-percentage point to 4.25 percent.

The British pound weakened to the lowest level against the dollar in almost two weeks after U.K. factory output fell 0.5 percent in May. The median forecast of analysts surveyed by Bloomberg News was for no change. Sterling slid as much as 0.9 percent to $1.9649 against the dollar, the lowest since June 24, from $1.9823 at the end of last week.

Japan's currency dropped 0.7 percent to 13.91 versus the South African rand and 10.41 against the Mexican peso as a rally in stocks encouraged investors to add to holdings of higher- yielding assets funded in Japan. The Standard & Poor's 500 Index climbed 0.3 percent.

In the carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 12 percent in South Africa and 7.75 percent in Mexico.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net.