Dollar May Rise Before Report Forecast to Show Confidence Boost

By Ye Xie and Candice Zachariahs

Aug. 15 (Bloomberg) -- The dollar may extend its gain versus the euro before a report forecast to show U.S. consumer confidence increased in August for a second month.

The euro dropped yesterday to a 5 1/2-month low against the dollar after crude oil fell and a report showed Europe's economy contracted for the first time since the 15-nation currency was introduced almost a decade ago. The pound declined to the lowest level against the dollar in 22 months on concern Britain's economy is falling into a recession.

``The tide has turned,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``The dollar's appreciation won't be as sharp going forward, but the trend will continue.''

Against the euro, the dollar traded at $1.4808 at 6:32 a.m. in Tokyo, after rising 0.6 percent yesterday and touching $1.4778, the strongest since Feb. 21. The U.S. currency was at 109.73 yen, following a 0.2 percent gain yesterday. The euro traded at 162.52 yen, after dropping 0.5 percent.

The European currency's decline accelerated yesterday after breaking $1.4840, a level at which traders had placed pre-set sell orders, according to Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.

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.

Weaker Pound

Sterling decreased 0.1 percent to $1.8686 yesterday after touching $1.8619, the lowest level 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. Against the euro, the pound rose 0.6 percent to 79.30 pence.

Crude oil for September delivery fell 1 percent to $114.89 a barrel yesterday after a 2.7 percent gain the previous day. 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.

The euro's 14-day relative strength index against the dollar was at 19 yesterday. A reading below 30 typically signals a change in price direction is imminent.

`Beyond the U.S.'

``What has driven the market in the past several weeks has primarily been events beyond the U.S. -- the slowdown in a number of other developed economies and also the decline in commodity prices,'' said Stephen Malyon, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``I think the U.S. dollar is going to come under some corrective pressure over the coming days, but we need a catalyst for that.''

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.

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.

ECB Stance

ECB council member Axel Weber said in a speech in Germany yesterday that it's ``premature'' to say slower economic growth will damp inflation in the euro area.

``He's blowing smoke,'' said FOREX.com's Dolan. ``Slow growth is the trading theme in the market. Commodities can't sustain the rebound for 24 hours. It's a bearish indicator for the euro and bullish for the dollar.''

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.

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.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.