Dollar Trades Near Two-Week High Against Euro as Oil Declines

By Kosuke Goto and Stanley White

July 9 (Bloomberg) -- The dollar traded near a two-week high against the euro as crude oil prices fell and the Federal Reserve pledged to support credit markets, improving the outlook for the world's biggest economy.

The currency traded near a two-week high versus the yen after Fed Chairman Ben S. Bernanke said the central bank may extend its emergency-loan program for securities firms into next year. The British pound may decline as an industry report showed U.K. consumer confidence slid to the lowest level since at least 2004 in June.

``The dollar will remain strong today,'' said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly traded financial group. ``Bernanke's comments relieved concern about credit instability. Oil prices may peak out sooner or later.''

The dollar traded at $1.5669 at 9:42 a.m. in Tokyo from $1.5670 in New York yesterday. It reached $1.5611 on July 7, the highest level since June 25. It traded at 107.40 yen from 107.50 yen yesterday. It touched 107.75 on July 7, the strongest level since June 26. The euro was at 168.31 yen from 168.45 yen.

The U.S. currency may rise to $1.5610 per euro and 107.75 a dollar today, Kato forecast.

The pound traded at $1.9699 against the dollar, from $1.9695 yesterday when it completed its fifth straight decline. Britain's currency was at 79.53 pence per euro from 79.56.

A Nationwide Building Society index of consumer confidence declined 6 points to 63, the lowest since the survey began in May 2004.

Financial Stability

The dollar climbed 0.4 percent against the euro yesterday after Bernanke said in a speech in Arlington, Virginia, that the Fed is committed to financial stability and may extend the duration of funding to dealers obliged to bid at U.S. government debt auctions.

The Fed's Primary Dealer Credit Facility, which provides direct loans, and the Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, were created in March in response to the credit crisis.

``Bernanke's comments actually represented how bad the situation is in the U.S. financial sector,'' said Yuji Kameoka, a senior economist and currency analyst in Tokyo at Daiwa Institute of Research, a unit of Japan's second-largest brokerage. ``It's true his comments helped dispel fears about a credit crunch, but investors won't be able to buy the dollar aggressively on his comments.''

`Inflation Pressures'

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in the target lending rate, now 2 percent, to prevent the housing slump and credit losses from plunging the U.S. economy into a recession.

Richmond Fed President Jeffrey Lacker told reporters in Washington yesterday that the weak dollar may fuel ``inflation pressures,'' echoing Bernanke's comments last month that policy makers are ``attentive'' to the effect of the dollar's decline. Bernanke and U.S. Treasury Secretary Henry Paulson are scheduled to testify before Congress tomorrow.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, was at 72.97 from 73.012 yesterday, when it reached the highest level since June 24.

Crude oil for August delivery traded at $136.05 a barrel after tumbling 3.8 percent yesterday, extending its decline from a record high of $145.85 on July 3. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

ECB's Trichet

Any gains in the euro may be limited by speculation European Central Bank President Jean-Claude Trichet will reiterate that he has no plans to raise interest rates further. The ECB said it has ``no bias'' for monetary policy after increasing borrowing costs by a quarter percentage point to 4.25 percent on July 3.

Trichet presents the central bank's annual report to the European Parliament at 9 a.m. in Strasbourg today. ECB board member Jose Manuel Gonzalez-Paramo also speaks at a conference in Madrid at 9:30 a.m.

``The chance of the euro breaking new record highs is receding,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Trichet won't go out his way to talk about raising rates. He's pretty comfortable with where rates are now, and that takes the energy out of the euro.''

The 15-nation currency may fall to $1.56 today, he said.

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