Euro Falls Against Dollar as ECB Cites Economic Growth Concern

By Anchalee Worrachate

Aug. 7 (Bloomberg) -- The euro weakened against the dollar after European Central Bank President Jean-Claude Trichet said second-half economic growth will slow, reducing expectations the ECB will raise interest rates again this year.

The European single currency earlier rose as high as $1.5502 after Trichet said inflation risks remain elevated. The ECB kept its main rate at 4.25 percent, a seven-year high.

``It's pretty clear the market is reacting very strongly to his comments about growth,'' said Michael Metcalfe, head of macro strategy at State Street Global Markets in London. ``But the inflation concern is there, and needs to be outweighed by growth concerns, or dissipate before the ECB can really do a U-turn on policy.''

The euro traded at $1.5394 at 2:38 p.m. in London, from $1.5408 yesterday. It fell 0.5 percent against the yen, to 168.25, from 169.16.

Inflation in the euro region accelerated to 4.1 percent in July, the fastest pace in more than 16 years and more than double the ECB's 2 percent ceiling.

Trichet said today he has ``no bias'' or ``pre-commitment'' toward future rate movements, repeating what he said July 3 after policy makers increased the main refinancing rate a quarter- percentage point. Since then, government reports including retail sales and consumer confidence showed economic growth is flagging.

``We're identifying downside risks on growth since a number of months,'' Trichet said at a press conference in Frankfurt. ``There's some materialization of risks that we had identified.''

Economic Malaise

European retail sales dropped by the most in at least 13 years in June as a surge in oil and food costs left consumers with less money to spend on other goods, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the EU said July 30.

``We think that the council is unlikely to sign up to a further policy rate increase given the sharp deterioration in the business climate,'' a team of Barclays Capital currency strategists, led by David Woo, wrote in an investor note today.

The euro may decline to $1.5224 against the dollar in the next two weeks, said Pak Lai Ng, a technical analyst at Forecast Pte in Singapore, citing charts traders use to predict price movements.

Support at $1.5224 is the single European currency's average price for the past 200 days. The euro is likely to decline as its weekly stochastic and moving average convergence/divergence charts are showing sell signals, Ng said.

Dollar Index

The inflation rate for the euro region rose to 4.1 percent in July, the fastest pace in more than 16 years and more than double the ECB ceiling.

Traders pared bets the ECB will raise the main refinancing rate for a second time this year. The implied yield for the three- month Euribor contract for December was at 4.97 percent today, down from 5.03 percent yesterday and 5.07 percent at the end of last week.

The Dollar Index on the ICE futures exchange, which tracks the dollar against the currencies of six U.S. trading partners, was at 74.279, and rose to 74.322, the highest since Feb. 28.

A report from the National Association of Realtors today may show its index of U.S. pending home sales fell 1 percent in June, after a 4.7 percent drop the prior month, according to the survey median.

The Federal Reserve left borrowing costs unchanged on Aug. 5 at 2 percent, saying ``downside risks'' to growth remain, while inflation is a ``significant concern.''

Japanese Yen

Japan's currency strengthened against the dollar on speculation Japanese exporters took advantage of its recent weakness to repatriate overseas earnings at a more favorable rate than they initially assumed.

Large Japanese manufacturers forecast the yen would average 102.74 per dollar in the fiscal year started April 1, according to the Bank of Japan's quarterly Tankan business sentiment survey released on July 1.

The yen held gains after a government report showed orders for Japanese machinery fell less than economists estimated in June. Orders, indicative of capital spending in the next three to six months, slid 2.6 percent from May, when they climbed 10.4 percent. Economists predicted a 9.9 percent drop, a Bloomberg survey showed.

The South Korean won was little changed after the central bank raised the benchmark rate to 5.25 percent, the highest in eight years, to curb inflation. The currency traded at 1,016.45 against the dollar, compared with 1,015.90 yesterday.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net