Euro Falls to Near Six-Month Low on German Outlook, Drop in Oil

By Ye Xie and Cordell Eddings
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Aug. 20 (Bloomberg) -- The euro fell to near the lowest level against the dollar in six months as Germany's economic outlook deteriorated and crude oil prices declined.

The pound approached a two-year low versus the dollar as minutes of the Bank of England's August meeting indicated British inflation risks may have ``eased a little'' while the outlook for the economy worsened. The dollar has risen 8 percent versus the euro from the record low set in July.

``The market was waiting for a big correction after such a massive dollar rally, but they never got it,'' said Steve Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. ``People are pessimistic about European growth. They are coming back to buy the dollar on a dip.''

Against the dollar, the euro decreased 0.6 percent to $1.4695 at 12:02 p.m. in New York, from $1.4776 yesterday, when it touched $1.4631, the lowest level since Feb. 20. It reached the record high of $1.6038 on July 15. The currency fell 0.3 percent to 161.66 yen, from 162.13 yesterday, when it touched 160.87, the weakest level in three months. The dollar increased 0.2 percent to 109.98 yen, from 109.72.

The British pound dropped 0.4 percent to $1.8601 on the Bank of England's economic outlook, after touching $1.8512 on Aug. 15, the lowest level since July 2006.

BOE policy makers split three ways when they kept the target lending rate unchanged earlier this month, minutes of the Aug. 7 meeting showed today. Governor Mervyn King and six other members of the Monetary Policy Committee held the benchmark at 5 percent, while one official voted for a rate increase and another called for a cut to help sustain growth.

Freddie Mac

Crude oil fell 0.5 percent to $113.95 a barrel, reversing an earlier gain, after an U.S. Energy Department report showed a bigger-than-forecast increase in U.S. inventories. The euro- dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they move in lockstep.

The dollar has traded in a range of $1.46 to $1.48 per euro this week after advancing for five consecutive weeks, the longest stretch of gains since February 2006.

``We are in a consolidation period,'' said Tyson Wright, a senior currency trader in Victoria, British Columbia, at Custom House, a currency brokerage with 50,000 corporate accounts. ``The sentiment is still for a stronger U.S. dollar.''

The dollar briefly erased its gain versus the yen after the Wall Street Journal reported that executives of mortgage-finance company Freddie Mac are scheduled to meet with U.S. Treasury Department officials today.

`Unsettling News'

``To the extent that you get further unsettling news on the financial side, that will cause a turnaround and lead to more softening for the U.S. dollar,'' said Michael Gregory, a senior economist at the Bank of Montreal in Toronto.

Futures on the Chicago Board of Trade show a 21 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- point by its Dec. 16 meeting, down from 35 percent odds a week earlier. Policy makers next meet Sept. 16.

The euro fell 0.6 percent to 2.3855 Brazilian reais and 0.5 percent to 14.8998 Mexican pesos as Germany's Economy Ministry said in its monthly report that growth will remain moderate.

The country's BDB banking association said it no longer expects the economy to expand between 2.25 percent and 2.50 percent this year, and will lower its growth forecast on Sept. 18. German gross domestic product shrank 0.5 percent in the second quarter, the first contraction in four years.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net;