Dollar Advances Against Euro on Fed Rate Outlook, Oil Decline

By Kosuke Goto and Stanley White
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Aug. 5 (Bloomberg) -- The dollar rose toward a six-week high against the euro before a Federal Reserve meeting today at which policy makers may leave interest rates on hold and highlight concern about inflation.

The U.S. currency also climbed to a six-week high versus the British pound after crude oil fell to a 13-week low, adding to optimism lower fuel prices will help sustain growth in the world's biggest economy. Australia's dollar fell to a three- month low after the nation's central bank signaled it may cut borrowing costs.

``The Fed cannot be dovish on inflation risks,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``The dollar is also getting a boost from falling oil prices, easing concern over U.S. consumption.''

The dollar rose to $1.5542 per euro as of 7:54 a.m. in London from $1.5576 yesterday in New York. It touched $1.5515 on Aug. 1, the strongest level since June 24. It was at 108.07 yen, from 108.27 yen yesterday. The dollar strengthened to $1.9566 against the British pound, the highest since June 18, from $1.9623 yesterday. The euro fell to 167.85 yen from 168.64 yen.

The U.S. currency may rise to 108.60 yen today, Saito said.

The Australian dollar weakened to 92.15 U.S. cents, the lowest since April 14, after the Reserve Bank of Australia Board said there is ``scope to move towards a less restrictive stance of monetary policy,'' after keeping interest rates unchanged at a 12-year high of 7.25 percent.

Indonesian Rupiah

Indonesia's rupiah traded near the strongest level since March after the central bank raised interest rates today for the fourth time in as many months to combat inflation. The rupiah traded at 9,084 per dollar, from 9,087 yesterday. It reached 9,078 on Aug. 1, the highest since March 10, after gaining 1.4 percent last month.

The dollar advanced against the euro after the U.S. Commerce Department yesterday reported consumer inflation accelerated to 0.8 percent in June, the fastest pace since September 2005.

The greenback also gained as crude oil fell below $120 a barrel for the first time since May. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

Commodity Currencies

The yen advanced against 15 of the 16 most-traded currencies tracked by Bloomberg today as concern global economic growth will slow prompted investors to pare holdings of higher- yielding assets funded by borrowing in Japan. The yen rose the most versus the New Zealand, Australian and Canadian dollars after the Reuters/Jefferies CRB Index of 19 commodities had its biggest one-day decline since March.

The yen gained 0.8 percent to 78.30 per New Zealand dollar, 0.8 percent versus Canada's currency to 103.60, and traded at 99.49 against Australia's dollar from 100.63. The three countries' dollars are known as commodity currencies because the nations export raw materials.

``There is concern the world economy is going to be bad,'' said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., a unit of Britain's third-biggest bank. ``The yen is being buoyed by risk aversion.''

The euro weakened on speculation a slowing economy will deter the European Central Bank from raising interest rates.

Retail Sales

Retail sales in the 15 countries that share the euro fell 1.3 percent in June from a year earlier, reversing a 0.3 percent gain in May, according to a Bloomberg News survey. The European Union's statistics office will release the data at 11 a.m. in Luxembourg today.

The ECB will leave its benchmark rate on hold at 4.25 percent when it announces a decision on Aug. 7, a separate survey showed. The ECB raised rates by a quarter of a percentage point on July 3 to curb the fastest inflation in 16 years.

``The euro is in an adjustment phase and is likely to head lower,'' said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ``The euro won't rise even if the ECB raises rates again. The euro-zone economy is weakening and the central bank will have to acknowledge that.''

Europe's single currency may fall to $1.54 this week, Kurosawa said.

The Fed will keep its target rate for overnight loans between banks at 2 percent today, according to the median forecast of economists in a Bloomberg survey. The decision will be announced at 2:15 p.m. in Washington.

Price Stability

Fed Chairman Ben S. Bernanke last month abandoned his earlier assessment that risks to growth ``diminished,'' saying the U.S. faces threats to price stability and economic expansion.

Futures on the Chicago Board of Trade showed a 32 percent chance yesterday the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at the Federal Open Market Committee meeting on Sept. 16, compared with 38 percent a week earlier. The contracts showed a 65 percent chance the Fed will increase the rate by December, almost the same odds as a week earlier.

``The FOMC statement is going to sound a little bit'' dovish, Ashraf Laidi, chief currency analyst at CMC Markets in New York, said in an interview with Bloomberg Television. ``They are going to continue to say they are preoccupied with inflation, but acknowledging the decline in energy prices, so that may sound a little bit dovish,'' pushing down the dollar below 108 yen, 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.