Euro Declines to One-Week Low Before German Production Report

By Kosuke Goto and Stanley White

July 7 (Bloomberg) -- The euro fell to the lowest in more than a week against the dollar before a central bank report today that economists forecast will show German industrial production growth slowed in May.

The dollar also rose versus the yen on speculation leaders from the Group of Eight nations will signal they favor a stronger U.S. currency. Cooling economic expansion may deter the European Central Bank from increasing borrowing costs, diminishing the allure of euro-denominated assets.

``The sentiment on the euro is bad,'' said Kenichi Nishii, manager of the foreign-exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's biggest publicly traded lender. ``Faced with a worsening economic outlook, the ECB won't be able to raise rates anytime soon. The markets are also wary of any comments on dollar weakness from the Group of Eight summit.''

The euro fell to $1.5627 against the dollar, the lowest since June 25, before trading at $1.5636 as of 6:48 a.m. in London, compared with $1.5706 on July 4 in New York. It traded at 167.77 yen from 167.73. The dollar rose to 107.32 yen, the highest since June 26, from 106.80.

The South Korean won snapped two days of losses, rising 0.8 percent to 1,041.90 per dollar, after the government pledged ``stern action'' to stabilize the currency.

South Korea, India and Vietnam will fail to halt declines in their currencies by using intervention because their economies are slowing and trade deficits widening, said Morgan Stanley, the second-biggest U.S. securities firm.

`No Bias'

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

Annual growth in German industrial production slowed in May to 3.5 percent, from 4.8 percent the prior month, according to the median forecast of 27 analysts surveyed by Bloomberg News. That would be the slowest since August 2005. The Bundesbank in Frankfurt will release the data at noon today.

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

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

Pound Drops

The British pound weakened to a one-week low against the dollar on speculation U.K. industrial production fell 0.1 percent in May, after a 0.2 percent increase in April, according to the median forecast of analysts surveyed by Bloomberg News.

``Should industrial production data due today turn out to be weaker, that would raise concern over the U.K. economy further and lead to a decline in the pound,'' Tohru Sasaki and Junya Tanase, currency strategists at JPMorgan Chase & Co. in Tokyo, wrote in a research note today.

JPMorgan, the third-largest U.S. bank, predicted the Bank of England will keep borrowing costs on hold ``for the time being,'' a change from its previous estimate for higher rates in August.

The pound slid to $1.9753 against the dollar, the lowest since June 26, from $1.9823 on July 4. It may fall to $1.94 by the end of September, Sasaki said, confirming the research note.

Dollar Weakness

The Australian dollar bought 96.12 U.S. cents, near a 25- year high of 96.68 cents, before data that may show employment rebounded last month.

Australian job-vacancy advertisements declined by the most in almost two years in June, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne today.

Gains in the dollar may be limited by speculation industry reports this week will show U.S. home sales declined and consumer confidence fell to a 28-year low.

``The trend is for the dollar to weaken,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co. ``The data simply don't paint a favorable picture of the U.S. economy and that makes the dollar unattractive.''

The dollar may fall to $1.5730 per euro today, he forecast.

Pending home resales fell 2.5 percent in May following a 6.3 percent advance the previous month, according to a Bloomberg News survey of economists. The National Association of Realtors will release the data tomorrow at 10 a.m. in Washington.

The University of Michigan will say July 11 that its index of consumer sentiment fell to 55.5 this month, the lowest since May 1980, from 56.4 in June, according to a separate survey.

Credit Suisse Group AG, Merrill Lynch & Co. and Barclays Plc are telling investors to sell the peso in a bet Argentine President Cristina Fernandez de Kirchner will stop driving up the currency as the country's five-year-old expansion falters. The peso will drop 4 percent in the next year to 3.2 per dollar from 3.08, according to the median estimate of 13 analysts in a Bloomberg survey. It last stood at 3.0810.

``A slowing economy will pressure the government into letting the peso weaken,'' said David Beker, a currency strategist at Merrill Lynch in New York. He forecasts the peso will slide to 3.25 by year-end.

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