Euro Rises for Second Day on Crude Oil Gain, ECB Rate Outlook

By Ye Xie and Gavin Finch

Aug. 28 (Bloomberg) -- The euro rose against the dollar for a second day as an increase in crude oil prices led traders to raise bets that the European Central Bank will maintain borrowing costs at a seven-year high to curb inflation.

The 15-nation euro appreciated to near a record against the pound after ECB policy makers Axel Weber and Lucas Papademos said yesterday the central bank remains focused on fighting inflation. South Africa's rand strengthened versus the dollar as commodities including gold and platinum increased.

``Oil is helping weaken the dollar,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``We are still feeling the impact of hawkish comments from various ECB officials.''

The euro climbed 0.2 percent to $1.4754 at 10:32 a.m. in New York, from $1.4727 yesterday. Europe's currency traded at 161.12 yen, compared with 161.27. Against the pound, the euro advanced 0.4 percent to 80.51 pence after touching 80.61 pence, the highest since April 17. It reached 80.99 pence on April 16, the strongest since the euro's 1999 debut. The dollar fell 0.2 percent to 109.22 yen, from 109.49.

Crude oil for October delivery rose for a fourth day, increasing 0.1 percent to $118.27 a barrel, 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.

Dollar `Stalling'

``Oil prices dictate some of the future activities of the dollar,'' said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The recovery of the dollar is stalling a bit.''

South Africa's rand increased 0.7 percent to 7.6986 per dollar as gold advanced 1.7 percent to $847.80 an ounce and platinum added 2.1 percent to $1,473.50 an ounce. The precious metals are South Africa's largest exports.

The New Zealand dollar climbed 0.2 percent to 70.31 U.S. cents as commodity prices rose. Sales of commodities make up 70 percent of New Zealand's overseas shipments. The Australian dollar appreciated 0.7 percent to 86.47 U.S. cents after the Bureau of Statistics said second-quarter capital spending increased 5.7 percent, almost three times the median forecast of 23 economists surveyed by Bloomberg News.

ECB policy makers may need to raise borrowing costs once the economic outlook ``brightens'' toward the end of the year and in 2009, said Weber, who heads Germany's central bank, in an interview yesterday in Frankfurt. Papademos, the ECB's vice president, said in a speech in Buenos Aires that there's a risk of a wage-price spiral that would ``require a stronger degree of monetary tightening.''

European Inflation

Traders reduced bets that the central bank will cut its 4.25 percent main refinancing rate next year. The implied yield on the Euribor futures contract expiring in September 2009 rose 7 basis points, or 0.07 percentage point, to 4.53 percent today, up 17 basis points since the start of the week.

An annual inflation rate of 4 percent in the nations using the euro is twice the ECB's target of just below 2 percent. The yield advantage of two-year German government debt over comparable-maturity Treasuries widened to 1.44 percentage points from a two-month low of 1.54 on Aug. 13.

The dollar briefly pared its loss against the euro and yen today after the Commerce Department reported a 3.3 percent annualized increase in gross domestic product from April through June that was higher than the previous estimate of 1.9 percent. The economy grew at a 0.9 percent pace in the first quarter.

Dollar's Rally

The U.S. currency has gained 8 percent from a record low of $1.6038 per euro 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 six-week advance of the ICE futures exchange's Dollar Index may stall at 77.85, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London who uses charts to predict price movements. The index, which gauges the greenback against the currencies of six major U.S. trading partners, declined 0.5 percent to 76.71. It reached an eight-month high of 77.619 on Aug. 26.

Japanese investors are repatriating earnings on speculation that the U.S. housing slump will worsen, according to Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan's second-largest brokerage.

Investors' disposals of overseas bonds exceeded purchases by 1.42 trillion yen ($13 billion) in the week ended Aug. 23, the biggest net sales since at least 2001, the Finance Ministry said today in Tokyo. JPMorgan Asset Management Japan Ltd. said last week it was reducing holdings of debt of Fannie Mae and Freddie Mac, the two largest U.S. mortgage financers.

``The global economy is sluggish and Japanese investors can't take on risk, and so we've seen them reducing exposure to foreign assets,'' said Nagai. ``I'd expect the yen to continue appreciating for the rest of this year,'' to about 105 versus the dollar, he said.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net