Dollar Trades Near Six-Month High Against Euro on Oil, Economy

By Ye Xie and Anchalee Worrachate

Aug. 25 (Bloomberg) -- The dollar traded near a six-month high against the euro on speculation a 20 percent drop in crude oil prices from the record will support economic growth of the world's largest energy consumer.

Crude oil for October delivery fell the most in more than three years on Aug. 22. The euro fell against the yen before a survey tomorrow forecast to show business confidence in Germany dropped to the lowest level since 2005.

``The decline of oil prices took some pressure off the dollar,'' said David Watt, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``The dollar bull market is in place.''

The dollar traded at $1.4785 per euro at 9:10 a.m. in New York, compared with $1.4793 on Aug. 22. The U.S. currency fell 0.4 percent to 109.62 yen, from 110.07 at the end of last week. The euro declined 0.4 percent to 162.20 yen, from 162.83.

Crude oil has fallen almost 20 percent since reaching the all-time high of $147.27 on July 11. It tumbled 5.4 percent on Aug. 22, the biggest drop since December 2004. Crude oil for October delivery rose 0.5 percent today to $115.37 a barrel in New York after touching $114.03, the lowest since Aug. 20. 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.

German Confidence

The euro weakened against the yen and the dollar on speculation a decline 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 forecast of 35 economists surveyed by Bloomberg News. The report is due 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 fall 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.

`Short' on Euro

``We put up a recommendation to go short on the euro at $1.4858 and targeting $1.4350,'' wrote Nizam Idris, a currency strategist at UBS AG in Singapore, 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 0.75 percentage point over the next one to two months, Nizam wrote. The firm initiated a new short euro-dollar position on Aug. 22, betting the euro will decline, according to Geoffrey Yu, a currency strategist in London.

Resales of homes in the U.S. probably rose 1 percent in July to a 4.91 million annual rate, staying near June's 10-year low, according to the median forecast of 75 economists surveyed by Bloomberg News. The National Association of Realtors' report is due at 10 a.m. Washington time.

`Weak' Data

``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.''

While 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.

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 reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net