Dollar Posts Biggest Monthly Gain Since Euro Debuted in 1999

By Ye Xie

Aug. 30 (Bloomberg) -- The dollar posted its biggest monthly advance against the euro since the European currency's 1999 debut on evidence economic weakness that began in the U.S. spread and as crude oil prices declined.

The greenback increased against all of the other major currencies in August, climbing for a fifth straight month versus the yen. The pound depreciated the most against dollar since 1992, when financier George Soros made $1 billion breaking the Bank of England's defense of the British currency.

``The situation in the rest of the world is deteriorating much faster than the market was expecting,'' said MatthewStrauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets, in an interview on Bloomberg Television. ``The gains in the U.S. dollar were more by default.''

The dollar climbed 6.3 percent to $1.4673 per euro yesterday, from $1.5603 on July 31. It touched $1.4571 on Aug. 26, the strongest level since Feb. 14. The U.S. currency advanced 0.8 percent to 108.80 yen, from 107.91, in the longest stretch of monthly gains since January 2002. The euro fell 5.2 percent to 159.40 yen, from 168.39, the biggest monthly drop since March 2004.

The ICE futures exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose 5.3 percent this month. It reached 77.619 on Aug. 26, the highest this year.

Europe's GDP

Europe's gross domestic product shrank 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 this month. Annual inflation eased to 3.8 percent in August, from 4 percent the prior month. The ECB tries to keep inflation just below 2 percent.

``There's clearly a downward trend for growth and inflation,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``That argues for the euro to stay under pressure.''

Traders stepped up bets that the European Central Bank will reduce borrowing costs next year. The implied yield on the September 2009 Euribor futures contract fell to 4.48 percent yesterday from 4.63 percent at the end of July. The yield averaged 18 basis points above the ECB's benchmark from 1999 to August 2007.

The ECB will hold its main refinancing rate at a seven-year high of 4.25 percent at its meeting Sept. 4, according to all but one of the 53 analysts surveyed by Bloomberg News. Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, forecasts a quarter-point reduction.

Weaker Sterling

Sterling fell 8.2 percent to $1.8209 in August as a Nationwide Building Society report showed this week that the average value of a home in the U.K. fell 10.5 percent in August to 164,654 pounds ($301,500), the biggest drop since the last quarter of 1990. The pound dropped 2.3 percent to 80.52 pence per euro.

All of the 61 analysts surveyed by Bloomberg News forecast that the Bank of England will hold its target lending rate at 5 percent on Sept. 4.

Federal funds futures on the Chicago Board of Trade show a 19 percent chance that the Federal Reserve will increase its 2 percent benchmark by at least a quarter-percentage point by its Dec. 16 meeting. The odds were 73 percent a month ago. Policy makers next meet Sept. 16.

Fed Minutes

Policy makers agreed this month that their next change in interest rates will be to raise them, while reaching no conclusion on the timing of such a decision, said minutes of their Aug. 5 meeting released this week.

U.S. payrolls fell by 75,000 in August after a drop of 51,000 in the previous month, according to the median forecast of 61 economists surveyed by Bloomberg News. The unemployment rate is forecast to hold at 5.7 percent. The Labor Department is scheduled to release its report Sept. 5.

Crude oil for October delivery fell 7.6 percent this month to $115.55 a barrel. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net