Dollar Rises Against Euro on Speculation Decline Is Overdone

By Ye Xie and Gavin Finch
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Aug. 22 (Bloomberg) -- The dollar rose against the euro on speculation the biggest drop since June yesterday was overdone and as a decline in European industrial orders added to evidence of a deepening economic slowdown.

The greenback climbed from a two-week low against the yen after Reuters reported that Korea Development Bank is ``open to'' a purchase of Lehman Brothers Holdings Inc. Federal Reserve Chairman Ben S. Bernanke said falling commodity prices, a stable dollar and slowing growth should limit inflation.

``The recovery of the euro is uninspiring,'' said Alan Ruskin, head of currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The dollar bottoming is in place.''

The dollar climbed 0.6 percent to $1.4815 per euro at 10:20 a.m. in New York, from $1.4899 yesterday, when it fell 1 percent. The U.S. currency rose 1.4 percent to 109.96 yen, from 108.43. It touched 108.14 yesterday, the lowest since Aug. 5. The yen fell 0.8 percent to 162.90 per euro, from 161.57.

The U.S. currency has decreased 0.9 percent against the euro this week, the first drop in six weeks, on concern deepening credit-market losses and a surge in crude oil prices will prolong the U.S. economic slowdown. The dollar has dropped 0.6 percent versus Japan's currency, while the euro has increased 0.4 percent against the yen.

Dollar Index

The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, rose 0.5 percent today to 76.601. It fell 1 percent yesterday, the biggest drop in almost five months.

The pound fell 1 percent to $1.8588 and 0.6 percent to 79.79 pence per euro after a report showed U.K. economic growth stagnated in the second quarter. Sterling dropped for a fifth week against the dollar, declining 0.4 percent, its longest losing streak since February 2006. The pound decreased 1.3 percent versus the euro this week.

Industrial orders in the 15-nation euro area fell 7.4 percent from a year earlier, the most since December 2001, the European Union statistics office said today in Luxembourg. The German economy, Europe's largest, shrank 0.5 percent in the second quarter, the first contraction in four years.

The dollar rose against the yen after Reuters reported that Korea Development Bank may buy stakes in Lehman.

``We are studying a number of options and are open to all possibilities, which could include (buying) Lehman,'' a Korea Development Bank spokesman said, according to Reuters.

Lehman on Report

Lehman spokesman Mark Lane declined to comment on the Reuters report. Korea Development Chief Executive Officer MinEuoo-Sung also declined to comment.

The U.S. currency dropped against the yen yesterday as the Financial Times reported that the South Korean bank and China's Citic Securities Co. abandoned talks to buy a stake in Lehman this month.

Bernanke said in a speech at the Kansas City Fed's two-day conference on financial stability in Jackson, Hole, Wyoming, that dollar stability and price declines in oil and other commodities are ``encouraging.'' Still, the inflation outlook remains ``highly uncertain'' and the Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective,'' he said.

Crude oil for October delivery fell 1.4 percent to $119.49 a barrel. It surged 5.4 percent yesterday, the biggest increase since June 6, and has increased 4.9 percent this week. The euro- dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations based on value changes. A reading of 1 would mean they move in lockstep.

Yen vs. Rand

The yen fell 1.1 percent to 14.32 versus the South African rand and 1.1. percent to 68.08 against Brazil's real today as the possibility of a South Korean acquisition of Lehman Brothers encouraged a resumption of the carry trade, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher.

``Japanese investors are once again buying abroad trying to increase returns, and this is contributing to a downward move in the yen,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the largest French bank. ``The yen is going to remain weak as the outlook for the Japanese economy is deteriorating badly.''

Japanese investors were net buyers of 769.8 billion yen ($7 billion) in foreign assets in the week ended Aug. 16, the Ministry of Finance said yesterday. The BOJ held its target lending rate at 0.5 percent this week, compared with a 4.25 percent benchmark rate in Europe, 13 percent in Brazil and 12 percent in South Africa.

The New Zealand and Australian currencies headed for weekly gains versus the U.S. dollar on bets the biggest jump in commodity prices in 33 years will boost exports. The Reuters/Jefferies CRB Index of 19 commodities has surged 6.3 percent since Aug. 15, the biggest weekly gain since July 1975.

The kiwi increased 1 percent to 71.33 U.S. cents this week and touched 72.17 today, the highest level since Aug. 7. The Aussie rose 0.4 percent to 86.94 U.S. cents this week.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net