Euro Falls on Speculation ZEW Survey Held Near Record Low

By Stanley White and Kosuke Goto

Aug. 19 (Bloomberg) -- The euro fell to a six-month low against the dollar before a survey that may show investor confidence in Germany, Europe's largest economy, held near a record low.

``We expect a weaker figure than the market consensus,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``If that is the case, the euro will be sold further.''

The euro declined to a three-month low versus the yen on speculation a weakening economic outlook will discourage the European Central Bank from raising interest rates. The yen advanced against higher-yielding currencies including the New Zealand dollar and the British pound after Barron's said the U.S. government expects Fannie Mae and Freddie Mac, the biggest mortgage-finance companies, will fail to raise enough funds.

The euro declined to $1.4631, the lowest since Feb. 20, before trading at $1.4650 at 8:03 a.m. in London from $1.4694 in New York yesterday. The currency fell to 161.01 yen, the weakest since May 13, and traded at 161.15 from 161.82. The dollar was little changed at 110.00 yen.

The Australian dollar weakened to 86.49 U.S. cents from 87.28 cents late yesterday in Asian trading and fell to 95.08 yen from 96.21 after central bank minutes from an Aug. 5 meeting, released today, said policy makers could make a case for ``early'' rate increases. The Reserve Bank of Australia left rates at a 12-year high of 7.25 percent that day.

Near Record Low

The ZEW Center for European Economic Research's index of investor and analyst expectations was minus 62 in August, according to the median of 43 forecasts in a Bloomberg News survey. That's near last month's minus 63.9, the lowest since the survey began in 1991. ZEW releases the report at 11 a.m. in Mannheim.

A government report last week showed the euro region economy contracted in the second quarter. Traders have reduced bets the ECB will raise interest rates a second time this year, with the implied yield on the December Euribor contract dropping 12 basis points in the past month to 5.04 percent.

Deutsche Bank predicts the ECB will lower rates from 4.25 percent in the first quarter and the euro will decline to $1.45 against the dollar by year-end, Fukaya said. The median forecast in a Bloomberg survey of 37 analysts is $1.50.

Carry Trades

The yen rose to 77.71 per New Zealand dollar from 78.53 and advanced to 204.35 versus the British pound from 205.42, as speculation about Fannie Mae and Freddie Mac sent an Asian stock benchmark to a two-year low.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. The risk is that currency market moves erase those profits.

The MSCI Asia-Pacific Index of regional shares fell 2 percent. Borrowing costs are 0.5 percent in Japan, 8 percent in New Zealand and 5 percent in the U.K.

A U.S. government bailout of Fannie and Freddie would wipe out common stockholders, Barron's reported, citing an unidentified source in President George W. Bush's administration. The two companies have posted bigger-than-expected losses amid the worst housing slump since the Great Depression.

Crushed by Debt

``Crushed by ballooning debts, the regeneration by the banks' own efforts is becoming impossible,'' said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's largest lender by market value. ``Risk aversion among investors will cause further yen-buying.''

The Japanese currency may rise to 100 per dollar by year- end, Hayashi said.

The BOJ, which unanimously decided to keep rates unchanged today, cut its economic assessment for a second straight month at a monetary policy meeting, acknowledging that threats to growth outweigh decade-high inflation as its chief concern. The world's second-largest economy shrank last quarter, putting it on the brink of the first recession in six years.

The revised BOJ outlook ``will place even less pressure on the yen to appreciate in the middle to long term,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a research note today.

Forecast Change

RBS pushed back its forecast for a BOJ rate increase to the fourth quarter of 2009 from the second quarter, Yamamoto said, confirming the contents of the report. Japan's economy will contract an annualized 0.2 percent in the third quarter, versus an earlier forecast for a 0.9 percent increase, he said.

The dollar was little changed versus the yen before government reports forecast to show U.S. housing starts fell last month to the lowest level in 17 years and inflation slowed.

U.S. housing starts dropped to an annual rate of 960,000 in July, according to a survey by Bloomberg News before the Commerce Department's report today. The Labor Department will report that the producer price index climbed 0.6 percent in July after increasing 1.8 percent the previous month, according to a separate survey.

Futures on the Chicago Board of Trade showed yesterday a 26 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by its Dec. 16 meeting, down from 47 percent odds a week earlier. Policy makers next meet Sept. 16.

``The dollar is on course to decline across the board,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``Questions about a U.S. government bailout of Fannie and Freddie, combined with the housing starts data, paint an unfavorable picture of the U.S. economy.''

The dollar may fall to $1.4770 per euro and 109.70 yen today, he forecast.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.