Dollar Heads for Fifth Weekly Gain on Oil Drop, Global Slowdown

By Ye Xie and Anchalee Worrachate
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Aug. 15 (Bloomberg) -- The dollar headed for a fifth weekly gain against the euro, its longest winning streak in more than two years, as crude oil prices declined and economies from Germany to Japan contracted.

The U.S. currency rose to the strongest level in almost six months against the euro and a seven-month high versus the yen. The pound dropped for an 11th day against the dollar, the longest run of declines in at least 37 years, on speculation a recession will force the Bank of England to cut interest rates.

``The world is finding the dollar is very, very cheap,'' said Steven Englander, a currency strategist at Lehman Brothers Holdings Inc. in New York. ``There's significant revision of growth outlook and monetary policies outside the U.S. Changing global sentiment is bringing down commodity prices, which is helping the dollar.''

Against the euro, the dollar rose 0.8 percent to $1.4713 at 10:31 a.m. in New York, from $1.4826 yesterday. It earlier touched $1.4678, the strongest level since Feb. 20. The U.S. currency increased 0.5 percent to 110.32 yen, from 109.74. It earlier rose to 110.66, the strongest since Jan. 2. The euro fell 0.2 percent to 162.29 yen, from 162.68.

The dollar has risen 1.8 percent against the euro this week in its longest stretch of weekly gains since February 2006. The U.S. currency has increased 8.3 percent after reaching the record low of $1.6038 on July 15. The dollar is headed for a 0.3 percent advance versus the yen, its second straight weekly increase. The euro is poised for a fourth weekly decline against the yen, dropping 1.6 percent.

The dollar's 5.9 percent rally against the euro this month has led banks to raise their forecasts for the U.S. currency.

Lehman More Bullish

Lehman turned more bullish on the greenback yesterday, predicting it will advance to $1.43 by year-end and $1.40 by the end of March 2009. Goldman Sachs Group Inc. said yesterday the dollar has ``bottomed'' against the euro, predicting it will strengthen to $1.45 per euro in three months.

The median forecast of 38 analysts compiled by Bloomberg News was for the dollar to trade at $1.50 per euro by year-end and $1.40 by the close of 2009.

Sterling fell 0.6 percent to $1.8581 today after touching $1.8512, the lowest level since July 2006. The stretch of daily declines is the longest since at least January 1971. The pound has fallen 2.9 percent this week in the biggest weekly drop since July 2005. The Bank of England cut its forecast for economic growth this week, signaling it may reduce the 5 percent target lending rate.

The euro may also be undermined by Europe's proximity to the conflict between Russia and Georgia, said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

`Boris the Bear'

``Boris the bear may be stretching his claws,'' he said. ``That would be more negative to Europe than the U.S.''

The Dollar Index traded on the ICE futures market, tracking the greenback against the currencies of six U.S. trading partners, reached 77.252 today, the highest since Jan. 22.

Industrial production in the U.S. rose 0.2 percent last month, following a 0.4 percent gain in June, the Federal Reserve reported. The median forecast of 79 economists surveyed by Bloomberg News was for no change.

Europe's gross domestic product fell 0.2 percent in the second quarter, the first contraction since the 15-nation common currency was introduced in 1999, the European Union's statistics office said yesterday. Japan's economy shrank an annualized 2.4 percent in the second quarter, after expanding 3.2 percent in the previous three months, the Cabinet Office said this week.

UBS on ECB

UBS AG said today it no longer expects the European Central Bank to raise the main refinancing rate from 4.25 percent in September as economic growth slowed ``more rapidly than initially expected.'' The Federal Reserve cut its lending target to 2 percent in April.

Crude oil for September delivery declined $1.80 to $113.21 a barrel today, extending its decline to 23 percent since reaching a record $147.27 on July 11. 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 move in lockstep.

Two-year U.S. Treasury notes yielded 1.62 percentage points less than comparable-maturity German bunds. When the yield spread was at this level on June 23, the dollar traded at $1.5568 per euro, 9 cents weaker than now.

``The price action does not reflect the interest-rate differential,'' said Lehman's Englander. ``People are cutting their short-dollar positions. Investors hedged their foreign portfolio by shorting the dollar, and we are seeing a lot of these positions unwinding.'' A short is a bet that a currency will decline.

International buying of U.S. financial assets rose in June at the weakest pace since September, as investors sold stocks and demand weakened for corporate bonds. Total net purchases of long-term equities, notes and bonds dropped to $53.4 billion, from a revised $83.2 billion the previous month, the Treasury Department said today in Washington.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net