Euro Rises Against Dollar as Liebscher Says ECB Can Raise Rates

By Kim-Mai Cutler and Stanley White

July 25 (Bloomberg) -- The euro rose against the dollar after European Central Bank council member Klaus Liebscher said policy makers have room to raise interest rates for a second time this year even as economic growth falters.

The dollar also weakened before government reports forecast to show U.S. durable-goods orders and new-home sales dropped in June and after crude oil rose for a second day.

``A lot of people doubted that the poor economic data was going to spell the end of the tightening cycle'' in Europe, said David Woo, global head of currency strategy in London at Barclays Capital. ``The fact that the ECB is still talking tough and oil prices are starting to stabilize is psychologically supportive for the euro.''

The euro increased 0.4 percent to $1.5735 at 8:02 a.m. in New York, from $1.5677 yesterday. It also advanced 0.4 percent to 169 yen, from 168.28, after rising to a record high of 169.96 on July 23. The dollar was little changed at 107.40 yen, compared with 107.33.

The 15-nation euro was headed for a 0.7 percent decline against the dollar this week, its second consecutive decrease. The currency dropped 0.3 percent versus the yen. The dollar advanced 0.4 percent against the yen.

The euro was supported as Liebscher said ECB policy makers still have scope to raise borrowing costs. The Frankfurt-based central bank raised its main refinancing rate to 4.25 percent on July 3, citing the need to control inflation.

`Room for Maneuver'

``We haven't exhausted our room for maneuver,'' said Liebscher, who also heads Austria's central bank, in an interview in his Vienna office yesterday. ``I'm not that surprised'' by the latest economic data, he said. ``We expected a weaker second and maybe third quarter.''

Crude oil for September delivery rose for a second day, increasing as much as $1.02 a barrel, to $126.33 a barrel, on concern supply in Iran and Nigeria may be disrupted. 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.

Orders for U.S. durable goods, products that last several years, fell 0.3 percent in June, according to the median forecast of 78 economists surveyed by Bloomberg News. There was no change the previous month. The Commerce Department is due to release its report at 8:30 a.m. in Washington.

The department will report at 10 a.m. today that sales of new houses dropped to an annual pace of 503,000 last month, from 512,000 in May, according to a separate survey of economists.

The dollar was still headed for a weekly advance against the euro after Federal Reserve Bank of Philadelphia President Charles Plosser said on July 23 that interest rates should rise ``sooner rather than later'' to quell inflation.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.