Euro May Fall Before Report Forecast to Show Economy Contracted

By Ye Xie and Candice Zachariahs

Aug. 14 (Bloomberg) -- The euro may decline against the dollar before a report forecast to show Europe's economy contracted in the second quarter.

The yen dropped yesterday against the Canadian dollar and Brazil's real after an increase in crude oil prices led investors to buy back the currencies of commodity exporters. The dollar erased gains versus the euro as the first advance in crude oil in four days renewed concern higher energy costs may restrain U.S. consumer spending.

``The one thing that's problematic for the euro is the GDP data coming out, which everybody is very anxious about,'' said Boris Schlossberg, director of currency research in New York at online currency trader GFT Forex.

The euro traded at $1.4917 at 6 a.m. in Tokyo, after reaching a 5 1/2-month low of $1.4816 on Aug. 12. The yen was at 109.38 per dollar, following a 0.1 percent decline yesterday. Japan's currency traded at 163.13 per euro, after dropping 0.2 percent and reaching 161.40, the strongest level since May 16.

Europe's economy shrank 0.2 percent in the second quarter, after 0.7 percent growth in the previous three months, according to the median forecast of 40 economists surveyed by Bloomberg News. The European Union's statistics office in Luxembourg will release the data today.

The pound fell to a 22-month low against the dollar yesterday after the Bank of England cut its growth forecast and unemployment increased the most in almost 16 years. Sterling dropped as much as 1.7 percent to $1.8640, the lowest since October 2006, in its ninth straight drop. The pound declined as much as 1.5 percent to 79.86 pence per euro, the weakest level since July 14.

Yen Turnaround

Japan's currency fell 0.8 percent to 68.01 versus the Brazilian real yesterday after earlier rising 1.2 percent to 66.68, the strongest since July 18. The yen dropped 0.4 percent to 103.13 versus the Canadian dollar following a gain of 1.2 percent to 101.52, the highest since April 24.

``It really looks to be a short squeeze,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``It caught the market napping.''

Commodities such as oil and gold account for half of Canada's exports. The real has gained 8.4 percent against the yen this year as coffee and sugar prices rose.

Crude oil for September delivery increased 3 percent to $116.37 a barrel yesterday after a U.S. Energy Department report showed a bigger-than-forecast decline in inventories of gasoline. Gold prices increased 1.8 percent to $827.20 an ounce.

Dollar's Gains

The dollar has gained 4.7 percent versus the euro this month, the biggest increase among major currencies, on speculation the European economy is slowing and a 6.5 percent drop in crude oil prices in August may moderate a slowdown in U.S. consumer spending.

``The resurgence of oil prices is causing the market to second-guess if the rebound of the U.S. dollar is temporary in nature,'' said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

Sales at U.S. retailers dropped in July for the first time in five months, the Commerce Department said yesterday in Washington, as record gasoline prices siphoned some of the tax rebates out of consumers' pockets.

The 0.1 percent decrease matched the median forecast of 75 economists surveyed by Bloomberg and followed a 0.3 percent gain in the prior month that was larger than previously reported.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.