Euro Declines to Six-Month Low After German Confidence Report

By Gavin Finch and Stanley White

Aug. 26 (Bloomberg) -- The euro dropped to the lowest level in more than six months against the dollar after a report showed business confidence in Germany fell more than forecast in August.

The currency also declined for a second day versus the yen on bets credit-market losses and slowing exports will deter the European Central Bank from raising interest rates this year. The yen rose against the Australian and New Zealand dollars as a drop in Asian stocks prompted investors to pare holdings of higher- yielding assets funded in the Japanese currency.

``The former powerhouse of the European economy, Germany, has started to weaken pretty quickly,'' said Paul Robson, a London-based currency strategist at the Royal Bank of Scotland Group Plc. ``It looks like the whole region will remain very weak and that's going to weigh on the euro.''

The euro slid to $1.4609, the lowest level since Feb. 14, and was trading at $1.4617 by 9:25 a.m. in London, from $1.4754 yesterday in New York. The currency weakened to 160.30 yen from 161.26, near a three-month low of 160.20 yen reached on Aug. 21.

The Ifo institute's German business confidence index declined to 94.8, the lowest level in three years, from 97.5 in July. Economists expected a drop to 97.2, the median of 35 forecasts in a Bloomberg News survey shows.

The pound declined to $1.8384, a two-year low, from $1.8532 yesterday. Data this week may show U.K. home prices fell by the most in almost two decades.

Carry Trades

The yen climbed to 93.68 per Australian dollar, from 94.30 yesterday. It also advanced 1.3 percent to 75.91 versus the New Zealand dollar.

Investors reduced so-called carry trades as the Dow Jones Stoxx 600 Index slid 1.2 percent and the MSCI Asia Pacific Index lost 1.1 percent on concern widening losses at financial firms will slow global growth and dent earnings. Topeka, Kansas-based Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The risk is that exchange rate moves erode those profits.

Japan's target lending rate of 0.5 percent compares with 7.25 percent in Australia and 8 percent in New Zealand.

The euro has lost 8 percent versus the dollar since touching an all-time high of $1.6038 on July 15, sliding as manufacturing and service industries in the 15-nation euro region contracted for a third straight month in August and crude oil dropped more than 20 percent from a record $147.27 a barrel set last month.

Rate Bets

``The combination of incremental weakness in the European economy and moderating oil prices should keep the pressure on the euro,'' said Manuel Oliveri, a currency strategist in Zurich at UBS AG, the world's second-biggest currency trader. ``We remain short euros''

Traders reduced bets the ECB will raise its 4.25 percent benchmark rate this year after the Ifo report. The implied yield on the Euribor futures contract expiring in December was 5.04 percent, down from 5.07 percent at the start of the month.

`There's good reason why the dollar is rallying, particularly against the euro,'' Kathy Lien, director of research at GFT Forex, said in an interview with Bloomberg Television. ``Once we get more speculation about the possibility of an ECB rate cut, that could push the euro-dollar a little lower.''

The yen declined against the dollar on speculation Japanese pension funds and institutional investors sold the currency to increase their holdings of Treasuries.

Treasury Auctions

The Treasury Department is scheduled to auction a record $32 billion of two-year notes tomorrow and $22 billion of five-year securities, the biggest such sale since February 2003, on Aug. 28. Japan is the largest foreign holder of Treasuries, according to U.S. government data.

``There's a new supply of Treasuries coming on line and that may lure some Japanese investors,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``Pension funds have been aggressive buyers of Treasuries in the past.''

Gains in the dollar may be limited by speculation new U.S. home sales declined. Purchases of new houses dropped 0.9 percent to an annual rate of 525,000 in July from 530,000 in June, according to a Bloomberg News survey of economists. New home sales fell to a 17-year low of 513,000 in March. The Commerce Department releases the data at 10 a.m. today in Washington.

``There's not going to be any improvement in the data out of the U.S. and the hope is that it doesn't get any worse than it already is,'' said Mitul Kotecha, global head of currency strategy at Calyon in Hong Kong. ``We could see the dollar being restrained in the short term.''

Pound Selling

The pound fell to near a two-year low against the dollar on speculation a slump in the housing market will weaken the economy, increasing the likelihood the Bank of England will reduce its 5 percent benchmark rate. Expansion stalled in the second quarter, a government report showed Aug. 22.

U.K. home prices slid by 9.6 percent in August from a year earlier, the most since at least 1991, according to a Bloomberg survey. Nationwide Building Society, Britain's fourth-biggest mortgage lender, will release the data on Aug. 28.

The implied yield on the March short-sterling futures contract fell 9 basis points to 5.18 percent, from 5.5 percent at the start of the month.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net