Dollar Trades Near Two-Month Low Before ECB Decision, Payrolls

By Kosuke Goto

July 3 (Bloomberg) -- The dollar traded near a two-month low against the euro as economists forecast the European Central Bank will raise its main refinancing rate by a quarter- percentage point and U.S. payrolls will drop for a sixth month.

The U.S. currency was also near a two-month low versus the Swiss franc on speculation an industry report today will show growth in U.S. services industries slowed for a second month. The Australian dollar was near a 25-year high before a government report that will probably show the nation's trade deficit shrank to the narrowest in 15 months in May.

``Bad news comes from the U.S. everyday,'' said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., the U.K.'s third-biggest bank. ``The ECB's rate hike today is a done deal and the ECB will remain hawkish. The euro may rise above $1.60 against the dollar today.''

The dollar dropped to $1.5891 per euro, the weakest level since April 24, before trading at $1.5881 at 9:31 a.m. in Tokyo, compared with $1.5882 yesterday. The U.S. currency fell to the all-time low of $1.6019 per euro on April 22. The dollar was at 105.87 yen from 105.91 in New York. The euro traded at 168.14 yen from 168.20.

The ECB will lift its 4 percent benchmark rate by a quarter-percentage point today, according to 57 of 58 economists surveyed by Bloomberg News. The euro rose 0.6 percent yesterday as ECB President Jean-Claude Trichet said there's a risk of inflation ``exploding'' if central banks aren't decisive.

The ECB announces its decision at 1:45 p.m. in Frankfurt and Trichet holds a press conference at 2:30 p.m., the same time the U.S. Labor Department releases its jobs data for June.

Dollar Index

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, was at 72.055 from 72.029 yesterday when it reached the lowest since May 27 as a private-sector report showed U.S. companies cut almost four times the amount of jobs as forecast by economists.

The U.S. currency was little changed at 1.0140 versus the Swiss franc, near the lowest level since April 24.

Australia's currency traded at 96.24 U.S. cents compared with 96.19 cents in New York and a 25-year high of 96.68 touched June 30. A government report today may show the shortfall narrowed to A$900 million ($859 million) from A$957 million in April, according to the median estimate of 24 economists surveyed by Bloomberg News.

`Master the Situation'

``If we act in a decisive way, we can master the situation,'' Die Zeit quoted Trichet as saying. The ECB confirmed the comments, which were made June 23 for an article to appear today.

Traders raised bets on higher ECB interest rates after Trichet's comments. The implied rate on the December Euribor interest-rate futures contract increased to 5.29 percent, the highest since June 23.

``Trichet will maintain a cautious stance on inflation, leaving some room for rate increases later this year,'' said Ayako Sera, a market strategist at Sumitomo Trust & Banking Co. in Tokyo, Japan's sixth-largest publicly traded lender by assets. ``The euro may challenge the $1.60 mark today.''

French President Nicolas Sarkozy, who has criticized Trichet for not following the Federal Reserve's example of cutting interest rates, said last week on France 3 television that the ECB ``should ask itself the question about economic growth in Europe and not only inflation.''

Yield Advantage

The yield advantage of two-year German bunds over comparable-maturity Treasury notes increased yesterday to 2.06 percentage points, the widest since June 6, making the European securities more attractive to investors.

Futures on the Chicago Board of Trade showed a 25 percent chance the Fed will raise its target rate for overnight lending between banks by a quarter-percentage point to 2.25 percent at its meeting on Aug. 5, compared with 36 percent odds a week ago.

The Labor Department will probably report today that U.S. employers eliminated 60,000 jobs including government positions last month, according to the median forecast of 79 economists surveyed by Bloomberg. The dollar weakened 1.2 percent against the euro and 1 percent versus the yen on June 6, when the government reported that the U.S. lost 49,000 jobs in May.

An index of service industries probably fell to 51 in June from 51.7 the prior month, economists forecast a report from the Institute for Supply Management will show.

`Very Bad Again'

The U.S. currency may depreciate to $1.69 per euro by September, wrote Citigroup Global Markets technical strategists Tom Fitzpatrick and Shyam Devani in a research note yesterday. A close weaker than $1.5844 would form a double bottom ``virtually identical'' to one before the decline to the record low reached in April, they wrote. The pattern forms when a currency falls, rises and then drops back to the earlier low.

``We cannot help but feel that things might be about to get very bad again soon,'' wrote New York-based Fitzpatrick and London-based Devani, who use charts to predict a currency's movements.

President George W. Bush said yesterday at the White House that ``we're strong-dollar people,'' while Treasury Secretary Henry Paulson said in London that the U.S. economy is ``going through a rough period.''

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net;