Euro Rises From Six-Month Low Against Dollar on Weber, Oil Gain

By Ye Xie and Gavin Finch

Aug. 27 (Bloomberg) -- The euro rose from a six-month low versus the dollar as European Central Bank council member Axel Weber said there's no scope for interest-rate cuts and crude oil prices increased for a third straight day.

The greenback fell against the yen on concern credit-market losses will widen after the Federal Deposit Insurance Corp. said the number of problem banks increased to the most in five years. The dollar pared its losses against the yen and the euro as a government report showed orders for U.S. durable goods unexpectedly rose last month.

``The euro is getting some support from Weber,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``Clearly we are not likely to see a rate cut in the near future.''

The 15-nation euro climbed 0.6 percent to $1.4741 at 9:17 a.m. in New York, from $1.4653 yesterday, when it touched $1.4571, the lowest level since Feb. 14. The dollar depreciated 0.1 percent to 109.49 yen, from 109.60. The euro advanced 0.5 percent to 161.41 yen, from 160.64.

The euro advanced as 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 13 basis points, or 0.13 percentage point, to 4.45 percent, after falling 6 basis points yesterday. The yield averaged 18 basis points above the ECB's benchmark from 1999 to August 2007.

Weber's Stance

Discussion about an ECB rate cut is ``premature,'' said Weber, who heads Germany's Bundesbank, in an interview in Frankfurt. Policy makers may need to raise borrowing costs once the economic outlook ``brightens'' toward the end of the year and next year, he said.

Crude oil for October delivery rose 1.8 percent to $118.30 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.

The euro has fallen 8 percent from a record high 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 euro depreciated yesterday to a six- month low after a report showed German business confidence dropped in August to the lowest level in three years.

U.S. Durable Goods

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 said today in Washington. The median forecast of 76 economists in a Bloomberg News survey was for no change in durable goods orders.

Federal Reserve policy makers agreed that their next move will be a rate increase, although they didn't indicate the timing, minutes of their Aug. 5 meeting showed yesterday.

Futures on the Chicago Board of Trade show a 17 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter-point in December, compared with 70 percent odds a month ago. Policy makers next meet Sept. 16.

The Dollar Index's chart is forming a double top, a ``catalyst'' that may push the U.S. currency lower, said Toru Tokoyoda, head of foreign-exchange sales in Tokyo at Lehman Brothers Holdings Inc.

Double Top

A double top occurs when a security makes two successive peaks and often indicates the reversal of a trend. The distance between the peaks and the lowest point of the double top may indicate the next support level, where buy orders are concentrated.

The ICE futures exchange's Dollar Index, which compares the greenback against the currencies of six U.S. trading partners, fell 0.4 percent to 76.933, from 77.251 yesterday. It rose to 77.413 on Aug. 19, fell to 76.022 on Aug. 21 and then rose yesterday to a second peak, the eight-month high of 77.619.

``Some players are taking their cue from this chart formation,'' said Tokoyoda, who predicts the dollar may fall to $1.4750 versus the euro today.

The FDIC said yesterday its ``problem list'' of banks increased 30 percent in the second quarter to 117 banks, the highest total in five years, as more commercial real-estate loans were overdue.

The agency, which provides cover for U.S. bank deposits, may have to tap Treasury Department funds to carry it through an anticipated wave of bank failures, the Wall Street Journal reported, citing chairman Sheila Bair. Bair told the Journal the borrowing wouldn't be to cover any FDIC losses. Instead, it would provide short-term liquidity to cover bank failures.

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