Dollar Falls on Speculation Reports to Show Flagging Spending

By Stanley White
Enlarge Image/Details

Aug. 27 (Bloomberg) -- The dollar fell from a six-month high against the euro and dropped versus the yen on speculation weakening U.S. business and consumer spending will delay a Federal Reserve interest-rate increase.

The greenback retreated from a two-year high against the British pound as economists forecast U.S. data this week will show declines in durable goods orders and slowing consumption. The Australian dollar rebounded from an 11-month low as rising Asian stocks gave investors confidence to buy higher-yielding assets overseas.

``The dollar still faces some risks of further declines,'' said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed bank. ``The U.S. economy is sluggish and I don't expect the Fed to hike rates until April or May of next year.''

The dollar declined to $1.4685 per euro at 8:14 a.m. in London from $1.4653 in New York yesterday, when it touched $1.4571, the strongest since Feb. 14. The dollar fell to 109.23 yen from 109.60. The euro was at 160.43 yen from 160.64 yesterday. The dollar slid to $1.8409 versus the pound from $1.84. It rose yesterday to $1.8331, its highest since July 2006.

The U.S. currency rallied yesterday after German business confidence declined this month to the lowest level in three years and the minutes of the Fed's last meeting showed that while policy makers agreed that their next move will be a rate rise they didn't indicate the timing.

Fed Futures

Futures on the Chicago Board of Trade show a 22 percent chance that the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point at a Dec. 16 meeting, compared with 70 percent odds a month ago. Policy makers next meet Sept. 16

The Australian dollar bought 85.89 U.S. cents from 85.15 cents late yesterday in Asia, when it fell to 84.94, the lowest since Sept. 20. It gained to 93.81 yen from 93.54 yesterday as MSCI's Asia Pacific Index of regional shares rose 0.5 percent, encouraging so-called carry trades.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the rates. The risk is that currency market moves can erase those profits.

Australia's benchmark interest rate is 7.25 percent, compared with 0.5 percent in Japan.

Durable Goods Orders

Bookings for U.S. goods made to last several years were unchanged in July, compared with a gain of 0.8 percent in June, according to a Bloomberg News survey of economists before a Commerce Department report at 8:30 a.m. today in Washington. A separate report on Aug. 29 may show personal spending rose 0.2 percent, less than half the 0.6 percent gain in June, according to a separate survey.

``The prospects for the U.S. economy are still poor and it will continue to slow,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``There's not a lot of reasons to own dollars.''

Gains in the euro may be limited by speculation German inflation slowed this month, reducing pressure on the European Central Bank to raise borrowing costs.

Germany's consumer prices rose 3.4 percent in August from a year earlier after a 3.5 percent increase in the previous month, according to a Bloomberg News survey. The report from the Federal Statistics Office is due today.

ECB Rates

The implied yield on the Euribor futures contract expiring in September 2009 fell 6 basis points, or 0.06 percentage point, to 4.32 percent. The yield averaged 18 basis points above the ECB's benchmark, currently 4.25 percent, from 1999 to August 2007.

``The euro is mired in a mid-term downtrend,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Slowing inflation is yet another reason why we can't expect the ECB to raise rates. Traders will continue to push the euro lower.''

The euro may fall to $1.4570 and 159.90 yen today, he said.

The 15-nation euro was headed for a 5.7 percent decline versus the dollar this month, its biggest monthly drop since its 1999 debut. It has fallen 4.7 percent versus the yen in August, the most since a 5.8 percent drop in March 2004, as a report showed the European economy contracted last quarter.

The dollar's declines against the euro, the yen and the pound accelerated on signs the Dollar Index is forming a double top on its chart, said Toru Tokoyoda, head of foreign-exchange sales in Tokyo at Lehman Brothers Holdings Inc.

Double Top

A double top is when a security makes two successive peaks and often indicates the reversal of a trend. The distance between the peaks and the lowest point of the double top may indicate the next support level a security will fall to.

The ICE futures exchange's Dollar Index, which compares the greenback against the currencies of six U.S. trading partners, was last at 76.880 from 77.251 yesterday. It rose to 77.413 on Aug. 19, fell to 76.022 on Aug. 21 and then rose yesterday to a second peak at 77.619.

``The double top in the Dollar Index was a catalyst to push the dollar lower,'' Tokoyoda said. ``Some players are taking their cue from this chart formation.''

The dollar may fall to $1.4750 versus the euro today, he forecast.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net