Dollar Rises to Six-Month High on Oil Decline, Global Slowdown

By Ye Xie and Candice Zachariahs

Aug. 16 (Bloomberg) -- The dollar climbed to the strongest level in almost six months against the euro and advanced to a seven-month high versus the yen as the European and Japanese economies shrank and crude oil dropped.

The U.S. currency gained against the euro for a fifth week, its longest weekly winning streak since February 2006. A report next week is forecast to show investor confidence in Germany was near the lowest in at least 16 years. The pound dropped this week against the dollar the most since July 2005 after the Bank of England cut its forecast for British economic growth.

The dollar rose 2.2 percent this week to $1.4687, from $1.5005 on Aug. 8. It touched $1.4663 yesterday, the strongest level since Feb. 20. The U.S. currency increased 0.3 percent this week to 110.53 yen yesterday, when it reached 110.66, the strongest since Jan. 2. The euro fell 1.9 percent to 162.30 yen, the biggest decrease since May.

Sterling fell 3 percent this week to $1.8661 after touching $1.8512 yesterday, the lowest level since July 2006. It declined in each of the past 11 days, the longest stretch since at least January 1971. Bank of England Governor Mervyn King said on Aug. 13 that there was a ``chill in the economic air,'' signaling policy makers may reduce the 5 percent target lending rate.

Futures traders bet for the first time since March 2007 that the dollar will advance against the euro. The difference in the number of wagers by hedge funds and other large speculators on a gain in the dollar compared with those on a decline, known as net longs, was 24,060 on Aug. 12, compared with net shorts of 20,886 a week earlier, the Washington-based Commodity Futures Trading Commission said.

`Turning Point'

``We're actually at a fundamental turning point for the dollar,'' said Simon Derrick, currency strategist in London at Bank of New York Mellon Corp. in an interview on Bloomberg Television.

Goldman Sachs Group Inc. said this week that the dollar has ``bottomed'' against the euro, predicting it will strengthen to $1.45 per euro in three months. Lehman Brothers Holdings Inc. turned more bullish on the dollar, predicting it will advance to $1.43 by year-end and $1.40 by the end of March 2009, compared with previous forecasts of $1.50 and $1.48.

The median forecast of 38 analysts compiled by Bloomberg News was for the dollar to trade at $1.50 per euro by year-end and $1.40 by the close of 2009.

The euro may be undermined further by Europe's proximity to the conflict between Russia and Georgia, said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

`Boris the Bear'

``Boris the Bear may be stretching his claws,'' he said. ``That would be more negative to Europe than the U.S.''

Europe's gross domestic product fell 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 week. Japan's economy shrank at an annual rate of 2.4 percent in the second quarter, the Cabinet Office said.

The ZEW Center for European Economic Research's index measuring German investor confidence was probably near the lowest since it was first compiled in December 1991, according to the median forecast of 43 economists surveyed by Bloomberg News. The report is due Aug. 19.

Crude oil fell 1.2 percent this week to $113.77 a barrel, extending its decline to 24 percent since reaching a record $147.27 a barrel 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 `Cheap'

``The world is finding the dollar is very, very cheap,'' said Steven Englander, a currency strategist at Lehman in New York. ``There's significant revision of growth outlook and monetary policies outside the U.S. Changing global sentiment is bringing down commodity prices, which is helping the dollar.''

The Dollar Index traded on the ICE futures market, tracking the greenback against the currencies of six U.S. trading partners, reached 77.268 yesterday, the highest since Jan. 22.

Dropping from an all-time high of 82.30 cents per euro set in October 2000, the dollar lost almost half of its value when it touched the record low of $1.6038 last month.

``We were in a seven-plus-year bear market for the dollar, and that pretty clearly is coming to an end,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, in an interview on Bloomberg Television. ``Has the rebound come a little bit too far, too fast? Yes, we think that's probably the case also.''

Two-year U.S. Treasury notes yielded 1.60 percentage points less than comparable-maturity German bunds. When the yield spread was at this level on June 13, the dollar traded at $1.5380 per euro, 7 cents weaker than yesterday.

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.