Euro May Climb for Second Day on Weber's Comments, Crude Oil

By Stanley White and Ye Xie

Aug. 28 (Bloomberg) -- The euro may rise against the dollar for a second day as European Central Bank council member Axel Weber said discussion about a reduction in interest rates is ``premature'' and crude oil prices increased.

The currency advanced from a six-month low versus the dollar yesterday as traders reduced bets that the ECB will lower borrowing costs next year. The yen fell from a three-month high against the euro and dropped versus South Africa's rand as an increase in orders for U.S. durable goods encouraged investors to sell Japan's currency and buy higher-yielding assets.

``The ECB is trying to correct some of the easing expectations in 2009,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``Oil is going to be bid up again. The dollar will have to give up some of its gains over the rest of the week.''

The 15-nation euro traded at $1.4726 at 8:39 a.m. in Tokyo, after rising 0.5 percent yesterday. It touched $1.4571 on Aug. 26, the lowest level since mid-February. The dollar was little changed at 109.47 yen. The yen traded at 161.22 per euro, after falling 0.4 percent. It strengthened beyond 160 on Aug. 26 for the first time since May 12.

Any declines in the dollar may be limited after the Nikkei English News reported, citing unnamed sources, that the U.S. Treasury Department, Japan's Finance Ministry and the European Central Bank in mid-March drew up plans to strengthen the dollar following troubles at Bear Stearns Cos.

Dollar Intervention

``Traders will be more wary about selling the dollar,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``While officials didn't intervene earlier this year, we have a clear sign of how far they're willing to go to prevent the dollar from going into freefall.''

The dollar slumped to record lows against the euro, the Swiss franc and hit a 12-year low versus the yen in March as the Fed sponsored a bail out of Bear Stearns and lowered interest rates to restore confidence in the financial system following the collapse of the U.S. subprime mortgage market.

ECB spokeswoman Eszter Miltenyi and Treasury spokeswoman Brookly McLaughlin declined to comment on the report.

Sterling fell to a two-year low versus the dollar yesterday and dropped against the euro on bets a deepening slump in the nation's housing market will force the Bank of England to cut interest rates. The pound was little changed at $1.8367 after yesterday declining to $1.8286, the lowest since July 2006. Against the euro, the British currency was at 80.20 pence, after reaching 80.31 pence, the weakest since June 9.

Weaker Yen

The yen dropped 0.7 percent to 14.13 versus the South African rand yesterday and 0.5 percent to 9.89 South Korean won as the boost in U.S. durable goods encouraged investors to resume carry trades, in which they 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 12 percent in South Africa and 5.25 percent in South Korea.

Bookings for U.S. goods made to last several years increased 1.3 percent in July after a revised gain of the same amount in the previous month, the Commerce Department reported yesterday. The median forecast of 76 economists surveyed by Bloomberg News was for no change in durable goods orders.

Traders reduced bets that the ECB will cut its 4.25 percent main refinancing rate next year. The implied yield on the Euribor futures contract expiring in September 2009 rose 11 basis points, or 0.11 percentage point, to 4.43 percent yesterday. The yield averaged 18 basis points above the ECB's benchmark from 1999 to August 2007.

ECB Stance

Policy makers at the ECB may need to raise borrowing costs once the economic outlook ``brightens'' toward the end of the year and next year, said Weber, who heads Germany's Bundesbank, in an interview in Frankfurt yesterday.

ECB council member Klaus Liebscher said in a speech yesterday in Berlin that ``vigilance is more necessary than ever'' regarding inflation. Annual inflation of 4 percent in the countries using the euro is twice the ECB's target of just below 2 percent.

``In order for the euro to go lower, the market has to see an indication of ECB rate cuts, which require inflation to come lower,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``We are finding equilibrium.''

Crude Oil Gains

Crude oil for October delivery rose 1.8 percent to $118.37 a barrel yesterday on forecasts Tropical Storm Gustav will strengthen as it enters the Gulf of Mexico, home to 26 percent of U.S. production. 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 moved in lockstep.

The euro has fallen 8 percent from a record of $1.6038 set on July 15 as the European economy shrank in the second quarter and crude oil declined 20 percent from its all-time high reached last month. The currency has dropped 5.9 percent against the dollar in August, the biggest monthly decline since the European currency began trading in 1999.

``The fall of the euro may be a little bit too far, too fast,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, in an interview on Bloomberg Television. ``I won't be surprised to see a little bit of a corrective rally. But that's in the overall declining trend.''

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net