Euro Falls Before Report Forecast to Show Economy Contracted

By Stanley White

Aug. 14 (Bloomberg) -- The euro fell against the yen before a regional report forecast to show Europe's economy contracted in the second quarter.

The currency also declined against the U.S. dollar for a second day as signs of slowing economic growth may prompt traders to reduce bets on higher interest rates in the 15 countries that share the euro. Australia's dollar was little changed, halting a 12-day losing streak, as prices of the commodities the country exports such as gold increased.

``The euro's weak trend is unlikely to change,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Europe's economy is facing so many difficulties that I can't be optimistic on the outlook for the currency.''

The euro declined to 162.84 yen at 10:27 a.m. in Tokyo from 163.43 late yesterday, when it reached a three-month low of 161.40. The euro was at $1.4876 from $1.4919. It fell to a 5 1/2-month low of $1.4816 on Aug. 12. The dollar bought 109.47 yen from 109.53.

The Australian dollar traded at 86.88 U.S. cents from 86.84 cents in late Asian trading yesterday, when it touched 85.93, the lowest since January. It rose to 95.08 yen from 94.60 as the UBS Bloomberg Constant Maturity Commodity Index gained 2.9 percent, climbing for the first time in four days. Gold, the nation's third most-valuable raw material export, increased for the first time this month.

The currency pared gains after Reserve Bank of Australia Deputy Governor Ric Battellino told lawmakers the central bank cannot wait for inflation to fall before it starts lowering interest rates from a 12-year high of 7.25 percent.

European Economy

Europe's economy shrank 0.2 percent in the second quarter, after 0.7 percent growth in the first, according to the median forecast of 40 economists surveyed by Bloomberg News. The European Union's statistics office in Luxembourg will release the data today. Germany's economy, the largest in the region, probably shrank the most since 1993, a separate survey shows.

Traders have reduced bets the European Central Bank will raise interest rates a second time this year on mounting evidence the slowdown sparked by the collapse of the U.S. housing market is spreading to the region.

The implied yield on the December Euribor futures contract is 4.95 percent, compared with 5.04 percent at the end of July.

Treasury Redemption

The yen may rise against the dollar on speculation Japanese investors will repatriate some earnings on investments in U.S. Treasuries.

The U.S. will pay $38.8 billion in principal and coupons on government debt tomorrow. Japan is the largest foreign owner of Treasuries, according to U.S. government data.

Japanese investors sold 461.3 billion yen ($4.3 billion) in overseas bonds and notes on a net basis last week, the second week of net sales and the most since the week ended April 18, the Finance Ministry said earlier today in Tokyo.

``There's a great chance that the yen will appreciate,'' said Akira Takei, the general manager in Tokyo for international bonds at Mizuho Asset Management Co., which oversees the equivalent of $37.3 billion. ``People want to avoid risks. Repatriation will play some part in yen strength as there is some comfort in holding funds in your own currency.''

Oil Prices

Any gains in the dollar may be limited by speculation a rebound in oil prices will discourage consumer spending in the world's largest user of the fuel. The U.S. dollar has risen 6.7 percent against the euro in the past month as the price of oil slumped more than 20 percent from a record.

Crude oil for September delivery rose 76 cents to $116.76 a barrel after a U.S. Energy Department report showed a bigger- than-forecast decline in inventories of gasoline.

``The resurgence of oil prices is causing the market to second-guess if the rebound of the U.S. dollar is temporary in nature,'' said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

Sales at U.S. retailers dropped in July for the first time in five months, the Commerce Department said yesterday in Washington, as record gasoline prices siphoned some of the tax rebates out of consumers' pockets.

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