Euro Falls for 3rd Day Before German Business Confidence Report

By Stanley White

Aug. 26 (Bloomberg) -- The euro fell for a third day against the dollar before a report forecast to show business confidence in Germany slumped to a three-year low in August.

The euro also declined for a second day versus the yen as traders pared bets the European Central Bank will raise interest rates this year. The yen rose against the Australian and New Zealand dollars as speculation insurer American International Group Inc. will post a loss prompted investors to pare holdings of higher-yielding assets funded in the Japanese currency.

``There's a good chance for the euro to go lower,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``People are giving up on bets for euro gains as the chance of an ECB rate hike fades away.''

The euro fell to $1.4721 at 10:24 a.m. in Tokyo from $1.4754 late yesterday in New York. It reached $1.4631 on Aug. 19, the lowest since Feb. 20. The euro weakened to 160.93 yen from 161.26, near the three-month low of 160.20 yen reached on Aug. 21. The dollar bought 109.41 yen from 109.30.

The yen climbed to 93.99 per Australian dollar from 95.34 late yesterday in Asia. It also advanced 1.9 percent to 76.39 versus the New Zealand dollar after U.S. stocks declined by the most in a month on concern credit-market losses will widen.

Investors reduced so-called carry trades after Credit Suisse Group said AIG may lose $2.41 billion this quarter on mortgage- related writedowns, helping drive the insurer's shares to a 13- year low. 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. Japan's target lending rate of 0.5 percent compares with 7.25 percent in Australia and 8 percent in New Zealand. The risk is that exchange rate moves erode those profits.

Ifo Survey

The Ifo institute's German business confidence index will decline to 97.2 in August, the lowest level since September 2005, from 97.5 the previous month, according to the median forecast of economists surveyed by Bloomberg News.

The euro has lost 8 percent versus the dollar since touching an all-time high of $1.6038 on July 15, sliding as a report showed the European economy shrank in the second quarter and crude oil dropped more than 20 percent from a record $147.27 a barrel set last month.

Rate Bets

Traders reduced bets the ECB will raise its 4.25 percent benchmark rate this year. The implied yield on the Euribor futures contract expiring in December was 5.045 percent, down from 5.065 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.''

Any gains in the dollar may be limited by speculation new home sales declined in the U.S., signaling a housing recession has yet to hit bottom.

Purchases of new houses dropped 0.9 percent to an annual rate of 525,000 in July from 530,000 in the previous month, according to the median estimate of economists in a Bloomberg News survey. 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.''

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