Dollar Declines on Speculation Rally Is Too Fast to Sustain

By Ye Xie and Gavin Finch

Aug. 18 (Bloomberg) -- The dollar fell from a seven-month high against the yen and declined versus currencies in New Zealand and Australia on speculation its recent rally is too fast to sustain.

The U.S. currency retreated from its strongest level in almost six months against the euro, falling for the first time in four days, before U.S. housing and inflation reports this week that may add to speculation that the Federal Reserve will delay raising interest rates.

``The dollar had a significant run without any consolidation,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``It's not surprising to see it taking a break.''

The U.S. currency declined 0.2 percent to 110.33 yen at 8:50 a.m. in New York, from 110.53 yen on Aug. 15, when it reached 110.66, the strongest level since Jan. 2. The dollar declined 0.3 percent to $1.4725 per euro, from $1.4687 at the end of last week. It touched $1.4647 today, the strongest since Feb. 20. The euro was at 162.43 yen, compared with 162.30.

The greenback fell 0.9 percent to 87.36 cents per Australian dollar, the biggest decline in a month. It dropped 1.1 percent to 71.41 cents per New Zealand dollar.

The dollar index, which tracks the greenback against the currencies of six U.S. trading partners, fell for the first time in 12 days, dropping 0.2 percent. It's up more than 7 percent since July 15 as economies outside the U.S. slowed and oil declined from a record.

Relative Strength

The 14-day relative strength index of the euro against the dollar was at 19.73 today. A reading below 30 suggests a currency is due for a turnaround.

Traders added to bets that the U.S. housing slump and widening credit-market losses will keep the Fed from raising interest rates this year after cutting them seven times beginning in September. Fed funds futures on the Chicago Board of Trade show a 21 percent chance the U.S. central bank will increase the 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by its Dec. 16 meeting, down from 47 percent odds a week earlier. Policy makers next meet Sept. 16.

Benchmark interest rates are 4.25 percent in the euro area, 7.25 percent in Australia and 8 percent in New Zealand.

U.S. housing starts dropped 9.9 percent to an annual rate of 960,000 in July, the fewest in 17 years, according to the median forecast of 66 economists surveyed by Bloomberg News before the Commerce Department report's tomorrow.

Wholesale Costs

A Labor Department report is forecast to show tomorrow that wholesale costs rose at a slower pace last month as fuel expenses peaked. The producer price index probably climbed 0.5 percent in July after increasing 1.8 percent the prior month, according to the median forecast of 70 economists in a separate Bloomberg News Survey.

Futures traders are betting for the first time since March 2007 that the dollar will advance against the euro, yen and British pound.

The difference in the number of wagers by hedge funds and other large speculators on a gain in the dollar compared with those on a decline, known as net longs, was 24,060 on Aug. 12, compared with net shorts of 20,886 a week earlier, figures from the Washington-based Commodity Futures Trading Commission showed on Aug. 15.

The dollar gained against the euro last week for a fifth week, its longest weekly winning streak since February 2006.

JPMorgan Chase & Co., the third-largest U.S. bank, raised its forecasts for the dollar against the euro, the pound and the Australian dollar.

Dollar Outlook

The dollar may trade at $1.47 per euro by year-end, compared with a previous forecast of $1.50, wrote Tohru Sasaki, chief currency strategist at JPMorgan in Tokyo, in a research note today. The currency will trade at $1.84 per pound and 84 cents against the Australian dollar by Dec. 31, compared with earlier forecasts of $1.85 and 93 cents he wrote.

``This is the unwinding of short-dollar positions,'' said Sasaki, confirming the report. Short positions are bets that a currency will decline.

Investor confidence in Germany remained near a record low, a survey report tomorrow is forecast to show. The ZEW Center for European Economic Research's index of investor and analyst expectations was minus 62 in August, according the median forecast of 43 economists surveyed by Bloomberg News. That's near last month's minus 63.9, which was the weakest since the ZEW began compiling the data in December 1991.

The Brazilian real is showing signs of weakening as a decline in commodity prices cuts export receipts and adds to concern that the current-account deficit, the broadest measure of trade, will keep widening.

The real slid 4.4 percent in the past two weeks to 1.6305 today as the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials sank 17 percent from July 2. Commodities account for about one-third of exports in Latin America's biggest economy.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.