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

By Stanley White

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 slid for an 11th day, its longest losing streak since 1975, and New Zealand's currency declined to an 11-month low as prices of raw materials the nations export declined.

``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 $1.4880 per euro as of 1:44 p.m. in Tokyo from $1.4909 yesterday in New York. It touched $1.4861, the strongest since Feb. 26. The dollar bought 110.17 yen, near a seven-month high of 110.40 yen set yesterday. The euro was at 163.96 yen after reaching 163.65 yen yesterday, the lowest since June 5. The dollar may rise to 110.40 yen today, Ishikawa said.

The Australian dollar declined to 87.58 U.S. cents, the weakest since Jan. 25, before trading at 87.76 cents from 89.02 cents in late Asian trading yesterday. New Zealand's currency dropped 0.9 percent to 69.76 U.S. cents.

Commodities Decline

The Australian and New Zealand dollars slumped as the UBS Bloomberg Constant Maturity Commodity Index dropped to the lowest since March 20. Raw materials account for 60 percent of Australia's exports, while sales of commodities including lumber make up 70 percent of New Zealand's overseas shipments.

Crude oil traded at $113.92 a barrel after yesterday falling to a 14-week low of $112.72. It has fallen 23 percent since touching a record $147.27 on July 11. 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.

Malaysia's ringgit fell for an eighth day, losing 0.6 percent to 3.3330 per dollar, the longest losing streak since a peg to the U.S. currency was scrapped in July 2005, on speculation the economy will cool as exports slow and inflation curbs consumer spending.

The Philippine peso weakened 0.6 percent to 44.643 versus the dollar, the lowest in almost three weeks, as the decline in raw-materials costs boosted the greenback.

Weekly Rally

U.S. stocks gained yesterday as commodities fell, adding to their biggest weekly rally since April. Treasury yields rose yesterday as 10-year notes posted their biggest decline in more than two weeks. The yield advantage offered by similar-maturity German bunds fell to 28 basis points, or 0.28 percentage point, near the lowest since May.

``The dollar's firm tone should continue for a little while,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader, wrote today in a research note. ``This is based on continued declines in commodities and gains in U.S. stocks and yields.''

The Dollar Index rose for an eighth straight day, the longest winning streak since March 2005, advancing 0.3 percent to 76.336. It touched 76.425, the highest level since Feb. 20. The index rose 1.7 percent 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.

German Growth

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. The government is due to report the data 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.''

Any gains in the yen may be limited by speculation Japan's economy is approaching a recession as export growth slows.

Gross domestic product shrank an annualized 2.3 percent in the three months ended June 30, following 4 percent growth in the previous quarter, according to the median estimate of economists surveyed by Bloomberg News. The Cabinet Office will release the report in Tokyo tomorrow.

`Weakening'

Japan's government said on Aug. 7 the economy is ``weakening'' for the first time since 2001. The worsening economy and the fastest inflation in a decade will compel the Bank of Japan to keep its benchmark interest rate at 0.5 percent for the rest of the year at least, according to economists surveyed last month.

``Weak growth numbers could push the yen lower against the dollar,'' said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo. ``It reinforces the notion that the BOJ will keep rates on hold.''

The yen may decline to 111.50 per dollar this week, he said.

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