Euro Trades Near 7-Week Low Versus Dollar Before ECB Decision

By Kosuke Goto and Ye Xie

Aug. 7 (Bloomberg) -- The euro traded near a seven-week low against the dollar before a European Central Bank meeting today which President Jean-Claude Trichet may keep borrowing costs at a seven-year high while acknowledging economic growth is slowing.

The single currency may fall for a third day versus the dollar after German factory orders unexpectedly fell in June, giving policy makers less reason to raise interest rates. The yen rose against 15 of the world's 16 most-active currencies on speculation Japan's exporters purchased it to pay bills, taking advantage of its slump to a seven-month low against the dollar.

``With the European economy weakening, Trichet cannot be very hawkish on inflation risks,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``I rather expect his dovish comments on the slowing economy. The euro has downside risk going into the ECB meeting.''

The euro traded at $1.5418 against the dollar at 8:27 a.m. in Tokyo, from $1.5408 in New York yesterday, when it touched $1.5398, the weakest since June 16. It was at 168.88 yen from 169.16 yen. the dollar was at 109.52 yen, from 109.79 yesterday, when it touched 109.88, the highest since Jan. 10. The euro may fall to $1.5350 against the dollar today, Saito forecast.

``This week will be a question of looking for subtle hints that the ECB will acknowledge the really bad data they've had on the growth side and some softening on the inflation side,'' said Michael Metcalfe, head of macro strategy at State Street Global Markets in London, in an interview on Bloomberg Television. ``That will ultimately become a theme and put a top on the euro- dollar, and eventually lead the euro to decline.''

Entered a Recession

The U.S. currency rose to the highest level since January against the yen yesterday after Shigeru Sugihara, head of business statistics at the Cabinet Office in Tokyo, said there is ``a high possibility'' the economy has entered a recession.

Japan's benchmark interest rate of 0.5 percent compares with 5.75 percent in Norway, 4.5 percent in Sweden and 5 percent in South Korea.

``Japanese investors are looking for better returns,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. The dollar is also ``the beneficiary of the decline in the oil price. This dollar rally is very impressive.''

The dollar touched a four-month high of 90.65 cents against the Australian dollar, and reached C$1.0495 versus the Canadian dollar yesterday, the highest since Sept. 11, after crude oil fell to as low as $117.11 a barrel. Oil has tumbled more than 20 percent since reaching a record $147.27 a barrel in New York on July 11.

Euro-Oil Correlation

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 Dollar Index on the ICE futures exchange, which tracks the dollar against the currencies of six U.S. trading partners, was little changed at 74.24 after touching 74.304 yesterday, the strongest since June 13.

The European Central Bank will keep its key interest rate at 4.25 percent today, according to the median forecast of economists surveyed by Bloomberg News. Trichet will hold a press conference after the rate decision in Frankfurt.

Trichet said on July 3 that he had ``no bias'' or ``pre- commitment'' after policy makers increased the main refinancing rate a quarter-percentage point.

`Call it a Bluff'

``I would call it a bluff if the ECB remains hawkish,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``Their growth numbers are pointing south. The ECB has to step away from their rhetoric eventually. The dollar is an attractive currency right now.''

Factory orders in Germany, adjusted for seasonal swings and inflation, declined 2.9 percent from May, the Economy Ministry in Berlin said yesterday. That's the biggest drop since July 2007.

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

Traders pared bets the ECB will raise the main refinancing rate for a second time this year. The three-month Euribor contract for December yielded 5.04 percent yesterday, down from 5.06 percent on Aug. 5.

UBS AG is buying the euro against the dollar as the ECB is still focused on inflation, Benedikt Germanier, a currency strategist in Stamford, Connecticut, wrote in a note.

``The hard facts have not yet changed, which is inflation standing at 4 percent,'' Germanier wrote. ``The market has pushed euro-dollar lower too quick in our view.''

The Federal Reserve left borrowing costs unchanged on Aug. 5 at 2 percent, saying ``downside risks'' to growth remain, while inflation is a ``significant concern.''

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Ye Xie in New York at Yxie6@bloomberg.net