Dollar Falls Against Yen as Personal Spending Slows in July

By Ye Xie and Gavin Finch

Aug. 29 (Bloomberg) -- The dollar declined against the yen as government reports showed consumer spending slowed and personal income dropped in July.

The greenback was headed for its biggest monthly advance against the euro since the European currency began trading in 1999. The pound slid to near a record low against the euro after a Bank of England policy maker said lower interest rates are needed to avoid a recession.

``The dollar rally is too far too fast,'' said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. ``All the indications point to weakness in consumer spending.''

The U.S. currency decreased 0.6 percent to 108.85 yen at 9:56 a.m. in New York, from 109.50 yesterday. Against the euro, the dollar traded at $1.4708, compared with $1.4706. The euro dropped 0.6 percent to 160.13 yen, from 161.04. The pound slid 0.3 percent to 80.60 pence per euro, after touching 80.69 pence, the weakest level since April 17. Sterling touched the record low of 80.99 pence on April 16.

The greenback has risen versus all of the other major currencies this month on speculation the economic slowdown that began in the U.S. is spreading to the rest of the world. The dollar has gained 5.9 percent versus the euro, the best performance since the European currency's debut.

``It's not surprising that the dollar has weakened given the extent of its recent gains,'' said Ian Stannard, a London- based currency strategist at BNP Paribas SA. ``We see some upside potential for the euro.''

Pound Versus Euro

The pound headed for a 2.3 percent monthly decline versus the euro, the largest since March, after Bank of England policy maker David Blanchflower said yesterday in an interview with Reuters that the central bank should cut the 5 percent target lending rate. The pound fell 0.2 percent to $1.8253 and fell 8 percent this month, the biggest decline since October 1992.

The euro has dropped 4.9 percent against the yen in August, the largest monthly drop since March 2004, on a contraction in the European economy in the second quarter.

European Central Bank Executive Board member Lorenzo Bini Smaghi said in an interview on Bloomberg Television yesterday that inflation in the euro area is ``too high'' and must be brought below the bank's limit. The ECB's main refinancing rate is at a seven-year high of 4.25 percent.

Annual inflation eased to 3.8 percent in August, from 4 percent the prior month, the European Commission in Brussels said today. ECB aims to keep inflation just below 2 percent.

Fed Rate Outlook

Futures on the Chicago Board of Trade showed a 19 percent chance that the Federal Reserve will increase its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by the Dec. 16 meeting, compared with 69 percent odds a month ago. Policy makers next meet Sept. 16.

U.S. personal spending increased 0.2 percent last month after a 0.6 percent advance in June, the Commerce Department said today in Washington. Personal income fell 0.7 percent in July after climbing 0.1 percent in the prior month. The median forecast of 73 economists surveyed by Bloomberg News was for a drop in personal income of 0.2 percent.

``For the dollar's rally to sustain, you need either a rate hike from the Fed or a rate cut from the ECB,'' said Wells Fargo's Serebriakov. ``Neither of them will happen in the near future.''

Crude oil for October delivery rose 2.5 percent to $118.45 a barrel on concern a tropical storm threatening U.S. oil rigs in the Gulf of Mexico will strengthen into the worst hurricane since Katrina. 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.

`Sell the Dollar'

``The recent rally in the dollar has likely come to an end,'' said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo. ``Traders are inclined to sell the dollar today as oil prices inch higher.''

The ICE futures Exchange's Dollar Index, which compares the greenback against the currencies of six U.S. trading partners, fell 0.3 percent to 76.938, cutting its monthly advance to 5.1 percent. It reached 77.619 on Aug. 26, the highest this year.

The yen advanced against all of the other major currencies today after the Japanese government said inflation exceeded 2 percent for the first time in a decade as food and oil prices surged. A separate report showed industrial production rose 0.9 percent last month, counter to a forecast decline.

Japanese Prime Minister Yasuo Fukuda, facing elections within a year, plans to spend about 2 trillion yen ($18 billion) to revive the world's second-largest economy, the government said in a statement today.

The yen rose 1.4 percent to 9.98 per South Korean won and 1.1 percent to 102.90 versus the Canadian dollar.

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