Euro Little Changed Against Dollar as ECB Cites Inflation Risk

By Anchalee Worrachate

Aug. 11 (Bloomberg) -- The euro was little changed against the dollar, rebounding from a 5 1/2-month low, after policy makers said the European Central Bank remains focused on inflation and traders judged last week's 3.6 percent drop excessive.

The European currency recovered from a two-month low versus the yen on speculation a government report this week will show consumer-price growth in the region accelerated to a 16-year high last month, more than double the ECB's 2 percent ceiling. Central bank council member Klaus Liebscher said policy makers remain focused on the ``worrying'' level of inflation, Market News reported today, citing an interview.

``The euro rebounded mainly because of comments from Liebscher and the fact the currency has moved down too far, too fast,'' said Adam Cole, the head of global currency strategy in London at RBC Capital Markets. ``Inflation remains a threat, and the ECB will keep reminding the market of that. But I suspect a longer-term story is a weak euro. Most bad news in the U.S. seems to already be in the price.''

The euro traded at $1.5010 at 8:01 a.m. in New York after falling to $1.4907, the lowest level since Feb. 26, from $1.5005 on Aug. 8. The single currency weakened to 164.78 yen, from 165.38 at the end of last week. It earlier touched 163.65 yen, the weakest level since June 5. The dollar fell to 109.81 yen, from 110.18.

Ruble Drops

The Russian ruble declined for a second day against the dollar-euro basket used to manage its fluctuations as armed clashes between Russia and Georgia in South Ossetia and Abkhazia deterred investors from holding the currency.

New Zealand's currency was little changed at 70.41 U.S. cents, after reaching 69.82 cents, the weakest since Sept. 11, 2007. Australia's dollar advanced to 89.05 U.S. cents, from 88.87. It touched 88.34 cents, the lowest level since Jan. 31.

``There is of course no bias for the future, and there is no pre-commitment, but what really has to be done in the future depends on the data available,'' Liebscher said, according to Market News. ``For us it's not either-or, growth or price stability. It is price stability. We have to do at a given moment of time what is necessary.''

Traders raised bets that the ECB will lift rates this year after leaving the main rate steady at 4.25 percent last week. The implied yield on December interest-rate futures, an indicator of interest rate expectations, increased 3 basis points from Aug. 8, to 4.96 percent.

Euro Plunge

The European single currency sank the most in almost eight years against the dollar on Aug. 8 as traders pared bets the ECB will raise interest rates as the economy slows. The weekly decline was the most since January 2005.

Further gains in the euro may be limited after a government report showed French industrial production, which accounts for 15 percent of the euro-area's second-largest economy, unexpectedly fell in June. Output slid 0.4 percent from May, when it declined 2.9 percent, according to Insee, the National Statistics Office in Paris. Economists in a Bloomberg survey had predicted an increase of 0.6 percent.

Investors may also be deterred after Moody's Investors Service said defaults on loans included in European commercial mortgage-backed securities rose 80 percent in the second quarter, sparking concern the financial turmoil in the region is deepening.

The ruble fell to 29.8459 against the basket. It earlier had a record 1.3 percent drop after sinking 1.2 percent at the end of last week.

Caucasus Conflict

Russia stepped up its bombing of Georgia, rejecting a proposed cease-fire agreed on by Georgian President Mikheil Saakashvili, as the European Union prepared to send a peace mission to Moscow. Russian warplanes dropped bombs on radar for Tbilisi airport overnight, and artillery and planes pounded the central town of Gori today, Georgian officials said. Russian aircraft also bombed the Black Sea port city of Poti, Georgian Deputy Defense Minister Batu Kutelia said by phone.

Five days of clashes between Georgia and Russia have left scores of people dead and threatened to disrupt a major energy transport route, helping push crude oil up from a 14-week low in New York. Oil rose 1 percent to $116.32 a barrel after sliding almost $10 last week. The price is up 62 percent in the past year.

The Swiss franc rose against 13 of the 16 most actively traded currencies tracked by Bloomberg, including the dollar and the euro, as concern the conflict will escalate prompted investors to pare so-called carry trades, in which traders buy higher- yielding assets using loans denominated in the Swiss currency.

The franc rose 0.3 percent to 1.6197 against the euro and advanced 0.3 percent to 1.0796 versus the dollar.

Dollar Bets

Negative economic news in the U.S. may not be over, according to Sophia Drossos, a strategist in New York at Morgan Stanley.

``I would not chase the dollar's strength versus the euro as the pair has moved beyond interest-rate support,'' said Drossos, who also recommended closing out bets on the dollar versus the currencies of Malaysia and Singapore. ``The dollar is not out of the woods. It will take the market a while to come around to our point of view.''

U.S. Treasury Secretary Henry Paulson said there are no plans to use his new authority to inject capital into mortgage companies Fannie Mae and Freddie Mac, which both posted worse-than-expected earnings last week.

``We have no plans to insert money into either of those two institutions,'' Paulson said in an interview with NBC's ``Meet the Press'' broadcast yesterday from Beijing. He added that their earnings results were ``not a surprise'' and that the housing slump will last beyond this year.

Confidence Lacking

Paulson and Congress last month brokered a plan to bolster the two government-sponsored enterprises that includes giving the Treasury the right to buy their shares. Fannie Mae and Freddie Mac, which account for almost half of the $12 trillion mortgage market, reported losses three times worse than estimated, prompting some analysts to predict that Paulson will have to act.

``Paulson's comments may weigh on the dollar,'' said Akio Shimizu, chief manager of foreign-exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``There may not be enough confidence in the mortgage lenders to assume they can survive without public funds.''

The dollar may decline to 109.40 yen today, he said.

Sales at U.S. retailers fell 0.1 percent in July after rising 0.1 percent in the previous month, according to the median estimate in a Bloomberg News survey. The Commerce Department will release the data on Aug. 13.

The Federal Reserve will say on Aug. 15 that industrial production was unchanged in July after rising 0.5 percent the prior month, according to a separate Bloomberg survey.

Dollar Predictions

The dollar's 3.8 percent surge against the euro this month was enough to prompt Bank of America Corp. to tell its customers to exit trades betting on more gains. Morgan Stanley still forecasts the greenback will approach a record low by October as the U.S. housing slump and credit-market losses keep the Fed from raising interest rates this year.

That's mostly because there's no indication the U.S. will return to the late 1990s annualized gross domestic product growth of 4.23 percent with inflation running at no more than 3.3 percent. Since September 2000, the dollar has declined more than 40 percent as inflation accelerated to an annual 5 percent rate, growth slowed to 1.9 percent and U.S. interest rates provide no cushion for holding U.S. assets.

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