Euro Rises on Speculation ECB's Trichet to Flag Inflation Risk

By Stanley White and Kosuke Goto

Aug. 6 (Bloomberg) -- The euro rose, rebounding from a seven-week low against the dollar, on speculation European Central Bank President Jean-Claude Trichet will signal higher interest rates may be needed to combat inflation.

The 15-nation currency also advanced against the yen before the ECB's meeting tomorrow, at which it will keep its key interest rate at 4.25 percent, according to a Bloomberg News survey of economists. Australia's dollar declined to a four- month low and Canada's currency traded near its weakest in almost a year as prices of commodities the nations export fell.

``With the ECB being a strong inflation fighter, Trichet may want to leave some room for further rate increases this year,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``The euro may be supported as long as there remains speculation over higher rates.''

The euro rose to $1.5508 at 7:50 a.m. in London from $1.5454 yesterday, when it touched $1.5447, the weakest since June 16. The euro advanced to 168.15 yen from 167.42. The U.S. currency was at 108.42 yen, little changed from yesterday. It earlier rose to a seven-week high of 108.48.

Taiwan's dollar dropped the most in more than two months before a report tomorrow that will probably show export growth slowed in July, according to the median estimate of economists surveyed by Bloomberg News.

The currency fell for a seventh day, sliding 0.3 percent to NT$30.809 against the U.S. currency, on speculation slowing growth will deter the central bank from raising rates.

Commodity Currencies

The Australian dollar dropped to 91.33 U.S. cents, the lowest since April 4, before trading at 91.87 from 91.85 cents late yesterday in Asia. Oil, Australia's fourth most-valuable commodity export, fell 24 cents to $118.91 a barrel. Gold, the country's third-biggest overseas shipment, weakened to below $900 an ounce for the first time since June.

The Canadian dollar traded at C$1.0420, near yesterday's low of C$1.0453, the weakest since Sept. 11. Raw materials account for more than half of Canadian and Australian exports.

Trichet will hold a press conference after the ECB announces its decision tomorrow at 1:45 p.m. in Frankfurt.

The inflation rate for the euro region rose to 4.1 percent in July, the fastest pace in more than 16 years, more than double the pace ECB targets.

Oil Price Boon

The U.S. dollar held near seven-week highs against the yen as oil tumbled to the lowest level in three months, supporting economic growth prospects in the world's largest consumer of the fuel.

Oil has lost more than $28 since touching a record of $147.27 a barrel in New York on July 11 as unprecedented fuel costs prompted U.S. consumers to limit spending.

``The U.S. dollar should continue to be buoyed,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co. ``The fall in oil is a plus for the U.S. At the same time, it encourages the withdrawal of funds from the commodity currencies.''

The dollar may rise to $1.5435 versus the euro and 108.50 yen today, he forecast.

`Off Their Peak'

Investors should buy the U.S. currency against the Canadian dollar as prices of commodities Canada exports such as oil are falling, according to Goldman Sachs Group Inc., the world's largest securities firm.

``Oil and other commodity prices are now clearly off their peak,'' wrote Kevin Edgeley and other Goldman strategists in a research note to clients yesterday. ``The dollar has responded with a break above the congestion range'' between C$1.03 and C$1.04, they said.

The U.S. dollar may extend gains to C$1.0865, the analysts said.

The Federal Reserve left borrowing costs unchanged yesterday at 2 percent, saying ``downside risks'' to growth remain, while inflation is a ``significant concern.''

Traders yesterday pared bets the Fed will raise interest rates on Sept. 16. Futures on the Chicago Board of Trade showed a 27 percent chance the Fed would increase its target lending rate at least a quarter-percentage point, down from 32 percent on Aug. 4.

``They are clearly not signaling tightening,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The dollar has already gained some ground. While commodities continue tanking, the rally can last a little bit longer here.''

British Pound

The pound was at $1.9559, trading near a seven-week low of $1.9521 touched yesterday, after a U.K. consumer confidence index fell the most in at least four years due to a housing market slump.

The dollar's advance against Japan's currency may stall at 108.76 yen, said Eiji Kinouchi, chief technical analyst at Daiwa Institute of Research, citing charts traders use to predict price movements.

The U.S. currency's 25-day moving average versus the yen has risen since late last month, a bullish signal for the next few weeks, Tokyo-based Kinouchi said. The dollar may keep climbing until it reaches 108.76, its 260-day moving average and a level where sell orders are likely to be placed, he said.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net