Dollar Trades Near 7-Week High as Oil Falls to Lowest Since May

By Stanley White and Kosuke Goto

Aug. 6 (Bloomberg) -- The dollar traded near a seven-week high against the euro as the price of a barrel of oil tumbled to the lowest level in three months.

The U.S. currency was near its highest versus the yen in more than a month on optimism lower crude prices will bolster economic growth in the world's largest consumer of the fuel. The Federal Reserve left borrowing costs unchanged yesterday at 2 percent, saying ``downside risks'' to growth remain, while inflation is a ``significant concern.'' The Australian dollar declined to a four-month low as prices of commodities fell.

``The U.S. dollar should continue to be buoyed,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co. ``The fall in oil is a plus for the U.S. At the same time, it encourages the withdrawal of funds from the commodity currencies.''

The dollar traded at $1.5471 per euro at 10:11 a.m. in Tokyo from $1.5454 yesterday, when it touched $1.5447, the strongest level since June 16. The U.S. currency was at 108.47 yen, little changed from yesterday. It earlier rose to a seven- week high of 108.43. The euro traded at 167.81 yen from 167.42. The dollar may rise to $1.5435 versus the euro and 108.50 yen today, Soma forecast.

The Australian dollar dropped to 91.33 U.S. cents, the lowest since April 4, before trading at 91.84 cents from 91.85 cents late yesterday in Asia. Oil, Australia's fourth most- valuable commodity export, fell 82 cents to $118.35 a barrel. Gold, the country's third most-valuable export, fell below $900 an ounce for the first time since June.

Crude Oil

Oil's decline also pushed the dollar higher versus the euro. 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 moved in lockstep.

Oil has lost more than $28 since touching a record of $147.27 a barrel in New York on July 11 as unprecedented fuel costs prompted U.S. consumers to limit spending. U.S. motorists drove less for a seventh consecutive month in May, pointing toward the first annual drop in road travel since 1980, the Federal Highway Administration said in a report last week.

``Falling oil prices are supporting the dollar,'' said Tetsuya Furukusa, chief manager at foreign-exchange margin trading department of Ueda Harlow Ltd., a holding company of Japan's largest currency broker. ``It reduces concern over the U.S. economy and hampers oil money flow from the Middle East into Europe, pushing down the euro against the dollar.''

The dollar may rise to $1.54 per euro today, he forecast.

Fed Futures

The Fed said yesterday financial markets remained ``under considerable stress,'' while the outlook for prices is ``highly uncertain.'' Dallas Fed President Richard Fisher dissented for a fifth time this year, preferring an increase.

U.S. stocks and the MSCI Asia-Pacific Index advanced for the first time in four days.

``With oil prices trading the way they are, and equity markets responding positively, I think the dollar is going to hold up pretty well this week,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

The dollar may strengthen beyond $1.53 per euro this week, Moran said.

Traders yesterday pared bets the Fed will raise interest rates on Sept. 16. Futures on the Chicago Board of Trade showed a 27 percent chance the Fed would raise its target lending rate at least a quarter percentage point next month, down from 32 percent on Aug 4.

``They are clearly not signaling tightening,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The dollar has already gained some ground. While commodities continue tanking, the rally can last a little bit longer here.''

The dollar fell to its all-time low of $1.6038 per euro on July 15 after Fed Chairman Ben S. Bernanke told the Senate Banking Committee that growth and inflation risks have both increased.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net