Dollar Trades Near One-Month High Versus Euro Before GDP Report

By Stanley White and Kosuke Goto

July 31 (Bloomberg) -- The dollar traded near a one-month high against the euro before a government report that is forecast to show the pace of U.S. economic growth doubled in the second quarter.

The U.S. currency was also near a one-month high versus the yen after a report from ADP Employer Services yesterday showed companies unexpectedly added jobs this month. The industry report is a leading indicator of tomorrow's Labor Department data on nonfarm payrolls. The pound fell toward a three-week low after U.K. consumer confidence slid to the weakest on record.

``The dollar is forming a solid base and further downside moves are limited,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Economic growth data are forecast to show quite good numbers. ADP data underpins sentiment.''

The dollar traded at $1.5577 per euro as of 11:12 a.m. in Tokyo, after touching $1.5522 yesterday, the strongest since June 24. The U.S. currency was at 107.99 yen after reaching 108.33 yesterday, the highest since June 25. The euro traded at 168.23 yen from 168.41 yesterday. The dollar may rise to $1.5520 per euro and 108.30 yen today, Ishikawa forecast.

The pound declined to $1.9795 from $1.9817 yesterday, when it reached $1.9746, the lowest since July 10. GfK NOP's index of consumer confidence fell to minus 39 in July, the lowest since the data began in 1974, the market research organization said today in London.

Australian Dollar

Australia's dollar fell toward its lowest in six weeks after a government report showed retail sales dropped the most since 2002, adding to signs the economy is slowing. The currency slid to 94.34 U.S. cents from 94.71 cents in late Asia yesterday as a Reserve Bank of Australia report showed lending to business and consumers rose at the slowest pace in almost six years.

U.S. gross domestic product probably rose at an annual rate of 2.3 percent in the second quarter after growing 1 percent in the first three months of the year, according to the median forecast of 79 economists surveyed by Bloomberg News. The Commerce Department is scheduled to release the report at 8:30 a.m. in Washington.

``We're waking up to the fact that we will have solid GDP numbers,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets.

Payrolls Report

The U.S. dollar strengthened yesterday after ADP Employer Services reported that companies added 9,000 jobs in July after cutting a revised 77,000 positions in the previous month. The Labor Department may report tomorrow that non-farm payrolls fell 75,000 this month following a decline of 62,000 in June, according to the median forecast in a Bloomberg News survey.

The U.S. payroll report, which includes government hiring, has shown a reduction in jobs each month this year, while ADP has recorded only two declines.

``The dollar may have hit a major bottom already,'' said Kosuke Hanao, head of foreign exchange in Tokyo at HSBC Bank, Europe's biggest bank by market value. ``But it needs further bullish factors to break through the key 108.60 yen level. Good GDP numbers are not strong enough to push up the dollar above it, especially before important jobs data tomorrow.''

The so-called resistance level of 108.60 yen is near the dollar's four-month high set on June 16. A resistance level marks the point where sellers are expected to outweigh buyers.

The dollar's advance may stall at 108.50 yen today, Hanao forecast.

The dollar fell to an all-time low of $1.6038 per euro on July 15 on concern losses at financial firms and record fuel prices may prolong the U.S. economic slowdown.

Emergency Lending

The Federal Reserve has extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still too weak to operate without a backstop from the central bank.

``It suggests the market is still fragile and we're not out of the woods yet,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``That means the Fed won't raise rates any time soon. I'm not buying the dollar.''

Futures contracts on the Chicago Board of Trade showed yesterday a 38 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 45 percent odds a day earlier. Most traders expect policy makers to keep borrowing costs unchanged when they next meet Aug. 5.

European Inflation

Losses in the euro may be limited by speculation a report today will show inflation in Europe accelerated to the fastest pace in more than 16 years in July, increasing pressure on the European Central Bank to raise interest rates.

The inflation rate rose to 4.1 percent, the highest since April 1992, from 4 percent in June, according to the median estimate of 36 economists in a Bloomberg News survey. The European Union statistics office in Luxembourg is scheduled to publish its initial estimate of the data at 11 a.m. today.

The ECB, which aims to keep the inflation rate just below 2 percent, raised its benchmark rate to 4.25 percent on July 3, the highest level since 2001. ECB council member Klaus Liebscher said on July 24 the bank has room to raise rates again even as economic growth falters.

``ECB officials remain hawkish even though the European economy is slowing,'' said Satoru Ogasawara, an economist at Credit Suisse Group in Tokyo. ``Provided economic figures continue to be not so bad, strong inflation figures will reignite expectations of a rate hike by the ECB.''

The euro may rise to $1.65 against the dollar in three months, he said.

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