Dollar Rises on Speculation Oil Decline to Bolster U.S. Economy

By Stanley White
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Aug. 25 (Bloomberg) -- The dollar rose for a second day against the euro on speculation a drop in oil prices will support growth in the world's largest energy consumer.

The currency also traded near a seven-month high versus the yen following the biggest decline in crude costs in more than three years. The euro fell against the yen before a survey tomorrow that may show business confidence in Germany slid to the lowest since 2005.

``Oil prices have come off the boil and that has done quite a lot to help the dollar,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``It does relieve some concern that the economic outlook will deteriorate.''

The dollar climbed to $1.4727 per euro at 7:45 a.m. in London from $1.4793 late in New York on Aug. 22, when crude oil tumbled 5.4 percent, the most since December 2004. It may advance to $1.47 per euro today, Shimizu forecast.

The U.S. currency traded at 110.03 yen from 110.07 at the end of last week. It rose to 110.66 yen on Aug. 15, the highest since Jan. 2. The euro declined today to 162.05 yen from 162.83.

The greenback also rallied against other Asian currencies. The South Korean won fell to 1,078.75 per dollar from 1,062.20 on speculation overseas investors will cut holdings of local shares. The Malaysian ringgit slumped to an eight-month low of 3.3740 versus the dollar on speculation the country's central bank will refrain from raising interest rates today.

Crude oil for October delivery was at $115.03 a barrel in New York after earlier falling to $114.03, the lowest since Aug. 20. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

Ifo Survey

The euro weakened against the dollar and the yen on speculation declines in German business confidence will discourage the European Central Bank from raising interest rates.

The Ifo institute's confidence index probably fell to 97.2 in August, the lowest since September 2005, according to the median estimate of economists surveyed by Bloomberg News before the release of the report tomorrow.

``The euro has downside risks before the Ifo data,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``European growth isn't looking that good, so people are likely to react more to data that support that view.''

Futures traders increased bets the euro will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 20,364 on Aug. 19, compared with 19,427 a week earlier.

Trading Recommendation

``We put up a recommendation to go short the euro at $1.4858 and targeting $1.4350,'' Nizam Idris, a currency strategist for UBS AG in Singapore, wrote in a research note today. ``Going forward, we expect a trend of deteriorating growth conditions to remain intact, and this will most likely keep the euro in a broad downtrend.''

UBS forecasts the ECB will cut its 4.25 percent benchmark rate by 75 basis points, or 0.75 percentage point, over the next one to two months, Nizam wrote.

Gains in the dollar may be limited by speculation that data this week will show U.S. home sales were near the lowest in a decade and consumer spending growth slowed as the economy grappled with rising credit losses after the subprime mortgage collapse.

U.S. Housing Market

Resales of existing homes, reported by the National Association of Realtors today, gained 1 percent to a 4.91 million annual rate, staying near June's 10-year low, according to a Bloomberg News survey of economists. U.S. personal spending grew 0.3 percent in July, compared with 0.6 percent the previous month, according to a separate survey before the Commerce Department report on Aug. 29.

``Weak economic data are likely to pull the dollar lower,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``We can't be optimistic about the outlook for growth. The subprime problem will also weigh on dollar sentiment well into the future.''

The U.S. currency may fall to 109.50 yen and $1.4820 per euro today, he said.

The pound slid to a two-year low of $1.8406 before data tomorrow that may show U.K. home prices fell 9.6 percent in August from a year earlier, according to a Bloomberg survey.

Technical Analysis

The currency may extend declines to $1.8300 in the next two weeks after the currency closed below so-called support at $1.8620 on Aug. 22, said Pak Lai Ng, a technical analyst at Forecast Pte. in Singapore.

Support at $1.8620 was a 61.8 percent retracement of the pound's rise from the November 2005 low of $1.7049 to the November 2007 high of $2.1161, based on a series of numbers known as the Fibonacci sequence. Support is where buy orders may be clustered.

The ouster of Pakistan President Pervez Musharraf was hailed by the government as a chance to turn around a crumbling economy that has left half of the 168 million population short on food. Investors aren't convinced, and that means more declines for the rupee.

A rally in the Pakistani rupee from its Aug. 15 record low of 76.50 per dollar last week faltered after two days, leaving the currency down 19 percent this year. The rupee is the world's fourth-worst performer, behind the Zimbabwean dollar, Turkmenistan manat and Icelandic krona.

Templeton Asset Management Ltd. and Aberdeen Asset Management Plc said they doubt Pakistan's new leaders have the resolve to slash outlays or raise borrowing costs to help curb the fastest inflation in 30 years at a time when the economy is slowing. The risk of failure has prompted investors, stung by a global slump in stocks and debt markets, to shun developing economies from India to Chile that face similar dilemmas.

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