Dollar Trades Near 5 1/2-Month High on Drop in Commodity Prices

By Stanley White and Ye Xie

Aug. 12 (Bloomberg) -- The dollar traded near a 5 1/2-month high against the euro on speculation tumbling commodity prices will give a boost to the world's largest economy.

The U.S. currency was also close to a seven-month high against the yen as crude oil traded near a 14-week low, copper fell to the weakest in six months and gold to the cheapest since December. The Australian dollar declined to the lowest in 6 1/2 months as the yield advantage of the nation's two-year bonds over U.S. Treasuries shrank to the least since November.

``The trend is for commodities to weaken and the dollar to strengthen,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``The U.S. economy is facing a slowdown, so lower energy prices are a source of relief.''

The dollar traded at $1.4898 per euro at 8:36 a.m. in Tokyo from $1.4909 yesterday, when it touched $1.4881, the strongest since Feb. 26. The dollar bought 110.14 yen, near a seven-month high of 110.40 yen. The euro was little changed at 164.08 yen after reaching 163.65 yen yesterday, the lowest since June 5. The dollar may rise to 110.40 yen today, Ishikawa forecast.

The Australian dollar declined to 88.33 U.S. cents from 89.02 cents in late Asian trading yesterday. It earlier touched 87.94 cents, the weakest since Jan. 29. The currency fell to 97.21 yen, from 97.72 yesterday.

The yield spread on two-year Australian government bonds over similar maturity Treasuries narrowed to 3.38 percentage points yesterday, the lowest since Nov. 28. The differential has shrunk from 5.1 percentage points on Feb. 29.

Commodities Plunge

Crude oil last traded at $114.60 a barrel after yesterday falling to 14-week low of $112.72. It has plunged 22 percent since touching a record high of $147.27 on July 11. The UBS Bloomberg Constant Maturity Commodity Index dropped to the lowest since March 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 move in lockstep.

``It looks like there's more downside risk to oil prices, and it gives some support to the dollar,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

Should the dollar stay beyond a resistance level of $1.4907 per euro, it may extend to $1.4550, according to Osborne. A resistance level is where selling orders concentrate.

Dollar Index

The Dollar Index rose for a eighth straight day, rising 0.2 percent to 76.24. It touched 76.362 yesterday, the highest level since Feb. 20. The index climbed 1.7 percent on Aug. 8, the biggest jump in six years.

Europe's currency sank 2.1 percent versus the dollar that day, the most since September 2000, as traders reduced bets that the European Central Bank will raise interest rates. Last week's 3.6 percent decline in the euro was the biggest weekly drop since January 2005.

Germany's economy, the largest in the 15-nation region that uses the euro, probably contracted in the second quarter for the first time in almost four years, according to the median forecast of 41 economists surveyed by Bloomberg News before the government report on Aug. 14.

``We clearly have weaker growth outside the U.S.,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut, in an interview on Bloomberg Television. ``That's enough for the dollar to sustainably gain ground.''

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net