Dollar Heads for Weekly Gain as Oil Extends Decline From Record

By Stanley White and Kosuke Goto

Aug. 8 (Bloomberg) -- The dollar headed for its biggest weekly gain against the yen in two months on speculation cheaper crude oil will bolster economic growth in the world's largest consumer of the fuel.

The euro slumped to a five-month low against the dollar and a three-week low against the yen after European Central Bank President Jean-Claude Trichet said risks to economic growth are ``materializing,'' reducing expectations policy makers will raise interest rates. The Australian dollar fell for a ninth day, its longest losing streak since 1980, as traders added to bets the nation's central bank will cut borrowing costs.

``Oil prices have turned out to be much more supportive of the dollar than I expected,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It does temporarily relieve some concern that the U.S. economy will weaken further. This is a plus for sentiment.''

The dollar traded at 109.65 yen at 10:35 a.m. in Tokyo, from 109.44 late yesterday and up 1.8 percent from the end of last week. The U.S. currency reached a seven-month high of 109.88 yen on Aug. 6.

The euro fell to $1.5195, the lowest since March 5, before trading at $1.5222 from $1.5325 late yesterday. It's set for a fourth weekly decline, the worst losing streak since May 2007. The euro weakened to 166.90 yen from 167.70 yesterday and 167.55 at the end of last week. It earlier reached 166.55 yen, the lowest since July 17.

Australian Dollar

Australia's dollar dropped to 90.01 U.S. cents from 91.10 cents late in Asia yesterday and 92.91 cents on Aug. 1 in New York. It earlier reached 89.84 cents, the lowest since March 24. The currency slipped to 98.61 yen from 99.71 yen yesterday and 100.07 yen last week. The Reserve Bank of Australia said it may lower borrowing costs, after keeping its key interest rate at a 12-year high of 7.25 percent on Aug. 6.

Crude oil for September delivery was $119.79 a barrel in New York, on course for a 4.2 percent decline this week. The price has dropped 19 percent since touching a record $147.27 a barrel on July 11 as unprecedented fuel costs prompted U.S. consumers to limit spending.

The ECB's Trichet said yesterday he has ``no bias'' or ``pre-commitment'' toward future rate movements after the central bank left the main refinancing rate at 4.25 percent. He told reporters at a press conference in Frankfurt that while inflation remains a threat, economic growth will be ``particularly weak'' through the third quarter.

`Pretty Grim'

European retail sales dropped by the most in at least 13 years in June, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the EU said July 30.

``The market is entitled to be scaling back significantly further ECB tightening,'' said David Simmonds, London-based global head of currency strategy at Royal Bank of Scotland Group Plc. ``Policy makers will continue to focus on inflation, but some of the real economic data has been pretty grim. In my opinion, 2009 will include a European rate cut and a weak euro story.''

Traders pared bets the ECB will raise the main refinancing rate for a second time this year. The three-month Euribor contract for December yielded 4.95 percent yesterday, down from 5.03 percent on Aug. 6.

Two-year German bunds rose yesterday, pushing the yield down 15 basis points to 4.09 percent. That's 1.66 percentage points higher than the same-maturity U.S. Treasury notes and compares with 2.03 points almost a month ago.

`Dollar Bull Phase'

A drop in the European currency below $1.53 signals ``a longer-term dollar bull phase,'' pointing to a further decline to $1.46, Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, wrote in a research note yesterday. He uses charts to predict currency moves.

The last time the euro traded below $1.53 was May 8.

The pound fell 1.9 percent from a week ago to $1.9374 after the Bank of England yesterday kept borrowing costs unchanged for a fourth month at 5 percent. The decision was predicted by all 60 economists in a Bloomberg News survey.

Any gains in the yen may be limited by speculation a slowing economy will prevent the Bank of Japan from raising interest rates from 0.5 percent, the lowest among industrialized economies.

There is ``a high possibility'' the economy has entered a recession, Shigeru Sugihara, head of business statistics at the Cabinet Office in Tokyo, said on Aug. 6. Gross domestic product shrank an annualized 2.3 percent in the three months ended June 30, according to the median estimate of economists surveyed by Bloomberg. The report is due on Aug. 13.

``Officials confirmed Japan may have entered a recession,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``This is a catalyst for Japan selling, such as Japanese stocks and the yen. With interest rates low, Japanese investors will keep sending money abroad.''

Japan's currency may fall to 109.80 a dollar today, Muramatsu said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net