Dollar Heads for Weekly Gain Before Consumer Confidence Data

By Stanley White

Aug. 15 (Bloomberg) -- The dollar headed for a fifth weekly gain against the euro, its longest winning streak in more than two years, before a report forecast to show U.S. consumer confidence increased for a second month.

The greenback rose to a 5 1/2-month high versus the European single currency on speculation a drop in oil prices will support economic growth in the world's largest consumer of the fuel. The euro and the pound headed for weekly declines on signs that Europe and the U.K. have fallen into a recession.

``The dollar could get a boost from positive economic data and falling energy prices,'' said Akio Shimizu, chief manager of foreign-exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The risks of an economic slowdown seem to be greater in Europe. That increases the relative appeal of the dollar.''

Against the euro, the dollar climbed to $1.4753, the strongest level since Feb. 21, before trading at $1.4762 as of 9:58 a.m. in Tokyo from $1.4826 yesterday. The dollar has risen 1.6 percent this week. The U.S. currency was at 109.91 yen from 109.74 yesterday and 110.18 on Aug. 8. The euro traded at 162.26 yen from 162.68 yesterday, for a 1.9 percent decline this week. The dollar may rise to 110.20 yen today, Shimizu forecast.

Sterling fell 2.9 percent this week to $1.8655 and yesterday touched $1.8619, the lowest since October 2006. The Bank of England cut its economic-growth forecast on Aug. 12, signaling it may reduce its 5 percent target lending rate.

Consumer Confidence

The Reuters/University of Michigan index of consumer sentiment probably increased to 62 this month, from 61.2 in July, according to the median forecast of 63 economists surveyed by Bloomberg News. The index fell to 56.4 in June, the lowest since 1980. The report is due at 10 a.m. New York time.

The dollar has ``bottomed'' against the euro, said Goldman Sachs Group Inc. yesterday in a revision of its forecast for the U.S. currency. The dollar will strengthen to $1.45 per euro in three months, compared with an earlier estimate of $1.56, said Goldman analysts led by London-based Thomas Stolper in a research note, citing weakening global growth, declining oil prices and an improved U.S. trade balance.

Crude oil for September delivery declined 64 cents to $114.37 a barrel. It has fallen 22 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.

Dollar and Oil

``The reason the dollar is firmer is primarily because oil is down,'' said Ray Attrill, global research director at Forecast Ltd. in Sydney, in a Bloomberg Television interview. ``Oil is down because Europe is in virtual recession and Japan is in recession, so the global demand backdrop for oil is much weaker. That is what's linking the euro and dollar together.''

The dollar may rise to $1.45 versus the euro in three months, he said.

Japan's economy shrank an annualized 2.4 percent in the April-June quarter, the Cabinet Office said on Aug. 13. Gross domestic product expanded 3.2 percent in the previous three- month period.

Europe's gross domestic product shrank 0.2 percent in the second quarter, after growing 0.7 percent in the first three months of the year, the European Union's statistics office said yesterday in Luxembourg. The German economy, Europe's largest, contracted for the first time in almost four years, the Federal Statistics Office said in Wiesbaden.

``We remain of the view that the euro remains a sell on rallies,'' Stamford, Connecticut-based UBS AG analyst Brian Kim wrote in a research note yesterday. ``We expect the trend of weakening growth conditions to continue. There will be room for the ECB to soften its stance further.''

Housing Market

Gains in the dollar may be limited by speculation a slowing housing market will discourage the Federal Reserve from raising interest rates to slow inflation at a 17-year high.

Sales of existing homes fell to a 10-year low in the second quarter, and the median price of a single-family house dropped 7.6 percent, the Chicago-based National Association of Realtors said yesterday. The U.S. consumer price index rose 0.8 percent in July, twice as much as economists had estimated, the Labor Department said yesterday.

Futures on the Chicago Board of Trade show a 30 percent chance that the Fed will increase the 2 percent target rate for overnight lending between banks by a quarter-percentage point at the Dec. 16 meeting, compared with 46 percent odds a month ago. Policy makers next meet Sept. 16.

``Given the weak economic backdrop, I can't really see a strong appreciation of the dollar over the next couple of months,'' said Thomas Kressin, a fund manager at Pimco Europe Ltd., in an interview on Bloomberg Television. ``We don't believe that the Federal Reserve will hike interest rates in the foreseeable future.''

-- With reporting by Paul Gordon in Hong Kong. Editors: Chris Young,

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