Euro Falls to Six-Month Low as German Business Sentiment Drops

By Ye Xie and Gavin Finch

Aug. 26 (Bloomberg) -- The euro fell to a six-month low against the dollar after a report showed German business confidence dropped in August more than economists forecast.

Sterling declined to the weakest level versus the dollar in two years as an industry report showed mortgage approvals held last month near a decade low. Economic weakness in Europe helped push an index measuring the dollar against the currencies of six U.S. trading partners to the highest level since December.

``The euro is hit hard today,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The market is coming around to the view that the extremely high level in the euro-dollar is not justified.''

The 15-nation euro dropped 0.8 percent to $1.4633 at 9:21 a.m. in New York, from $1.4754 yesterday. It touched $1.4571, the lowest level since Feb. 14. The currency fell 0.6 percent to 160.35 yen, from 161.26 yesterday, after reaching 159.99, the lowest level since May 12. The dollar increased 0.3 percent to 109.58 yen, from 109.30.

The greenback has risen against all of the other major currencies this month on evidence the economic slowdown that began in the U.S. is spreading to the rest of the world. The U.S. currency's gains range from a 10.4 percent advance against the Australian dollar to a 1.4 percent increase versus the Mexican peso.

The ICE futures exchange's Dollar Index, which compares the greenback against six other major currencies, rose to 77.619, its highest level since Dec. 26.

Weaker Pound

The pound dropped 1 percent to $1.8350 after touching $1.8331, the lowest level since July 2006. Banks granted 22,448 loans for house purchases in July, down 65 percent from a year earlier, the British Bankers' Association said. The reading is up from 22,369 in June, the lowest since 1996.

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

The Ifo institute's German business confidence index declined this month to 94.8, the lowest level in three years, from 97.5 in July. The median forecast of 35 economists surveyed by Bloomberg News was for a decrease to 97.2.

``The combination of incremental weakness in the European economy and moderating oil prices should keep the pressure on the euro,'' said Manuel Oliveri, a currency strategist in Zurich at UBS AG, the world's second-biggest currency trader.

ECB Rate Outlook

The euro dropped for a second day versus the yen and declined 0.4 percent to 2.3987 Brazilian reais as traders added to bets that the European Central Bank will cut interest rates next year. The implied yield on Euribor futures contract expiring in September 2009 fell 9 basis points, or 0.09 percentage point, to 4.29 percent. The yield averaged 18 basis points above the ECB's benchmark, currently 4.25 percent, from 1999 to August 2007.

The yen declined against the dollar on speculation Japanese pension funds and institutional investors sold the currency to increase their holdings of Treasuries.

The Treasury Department is scheduled to auction a record $32 billion of two-year notes tomorrow and $22 billion of five- year debt, the most since February 2003, the following day. Japan is the largest foreign holder of Treasuries, according to U.S. government data.

`Supply of Treasuries'

``There's a new supply of Treasuries coming on line, and that may lure some Japanese investors,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. ``Pension funds have been aggressive buyers of Treasuries.''

U.S. new home sales declined to an annual rate of 525,000 in July from 530,000 in the previous month, according to the median forecast of 76 economists surveyed by Bloomberg News. New home sales fell to a 17-year low of 513,000 in March. The Commerce Department is scheduled to release the data at 10 a.m. 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 reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net