Euro Falls Against Yen as German Business Confidence Slumps

By Ye Xie and Kim-Mai Cutler

July 24 (Bloomberg) -- The euro fell the most against the yen in more than a week as a drop in business confidence in Germany reduced speculation that the European Central Bank will raise interest rates again this year.

The dollar rose to the highest level against the euro in more than two weeks as the U.S. Senate considered a bill that allows Treasury Secretary Henry Paulson to bail out Fannie Mae and Freddie Mac. The pound dropped to the lowest in more than a week against the dollar as U.K. retail sales fell in June by the most since at least 1986.

``The focus in the foreign-exchange market at the moment is on the building evidence of a global slowdown,'' said Derek Halpenny, head of currency research in London at Bank of Tokyo- Mitsubishi, in an interview on Bloomberg Radio. ``That is certainly a plus for the dollar in the longer term.''

The euro declined 0.3 percent to 168.84 yen at 8:43 a.m. in New York, from 169.36 yesterday, when it reached a record high of 169.96. The currency dropped 0.2 percent to $1.5671, from $1.5698 yesterday, and touched $1.5638, the weakest since July 8. The dollar decreased 0.2 percent to 107.72 yen, from 107.90 yesterday. It earlier reached 107.99, the highest since June 26.

Sterling weakened from the highest level against the euro in seven weeks after British retail sales dropped in June by 3.9 percent as accelerating inflation prompted consumers to cut spending. The pound fell to $1.9863, from $2.9995, and 78.92 pence per euro, from 78.50 pence.

New Zealand Dollar

The New Zealand dollar fell against all of the other major currencies after the central bank cut its benchmark interest rate by a quarter-percentage point to 8 percent in the first reduction in five years. The currency fell 1.2 percent to 74.14 U.S. cents after touching 74.04, the lowest since Jan. 22. Central Bank Governor Alan Bollard said he may reduce rates again if inflation eases.

The 15-nation euro dropped for a third day versus the dollar after the Ifo institute said its German business climate index, based on a survey of 7,000 executives, dropped to 97.5 from 101.2 in June. The median forecast of 40 economists surveyed by Bloomberg News was for a decrease to 100.1 from a previously reported 101.3.

``The upside to the euro-dollar now seems limited given weakening economic numbers out of the euro zone,'' said Antje Praefcke, a currency strategist in Frankfurt for Commerzbank AG, Germany's second-biggest lender. The euro may trade at about $1.58 and break above 170 yen in the ``near term,'' she said.

ECB Rate

Traders pared bets the ECB will increase interest rates a second time this year, with the implied yield on the December Euribor futures contract falling 8 basis points to 5.13 percent. The Frankfurt-based central bank raised its main refinancing rate to a seven-year high of 4.25 percent on July 3.

The House of Representatives approved a rescue package yesterday that gives Paulson authority to buy shares in and lend funds to Fannie Mae and Freddie Mac and provides for a federal agency to insure refinanced home loans. The bill still has to pass through the Senate.

The dollar fell to a record $1.6038 per euro on July 15 as traders speculated that Fannie and Freddie, which own or guarantee almost half of the $12 trillion in outstanding U.S. home loans, would be forced to seek a bailout.

Futures traded on the Chicago Board of Trade showed a 49 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 34 percent odds a week ago. Policy makers next meet Aug. 5.

U.S. Housing

The National Association of Realtors will say today that sales of previously owned homes fell to a 4.94 million annual pace in June, from 4.99 million in May, a Bloomberg survey of economists showed. The Commerce Department will report tomorrow that sales of new houses dropped to an annual pace of 503,000 from 512,000 in May, a separate survey shows.

The dollar briefly pared its gain versus the euro as the Labor Department said initial jobless claims increased to 406,000 in the week ended July 19, from a revised 372,000 the prior week. The filings exceeded economists' forecast and were the most since 406,000 in the week ended March 29.

To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.