Euro Trades Near Six-Month Low Before German Inflation Report

By Stanley White and Ye Xie

Aug. 27 (Bloomberg) -- The euro traded near a six-month low against the dollar before a government report forecast to show German inflation slowed this month, reducing pressure on the European Central Bank to raise borrowing costs.

The 15-nation euro was headed for its biggest monthly drop against the dollar since its 1999 debut after data yesterday showed German business confidence weakened more than economists expected. The Australian dollar rebounded from an 11-month low as rising U.S. stocks gave investors confidence to buy the nation's higher-yielding assets.

``The euro is mired in a mid-term downtrend,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Slowing inflation is yet another reason why we can't expect the ECB to raise rates. Traders will continue to push the euro lower.''

The euro traded at $1.4645 at 8:51 a.m. in Tokyo, after touching $1.4571 yesterday, the weakest since Feb. 14. The euro was at 160.43 yen from 160.64 yesterday when it dropped to 159.95, the lowest level since May 12. The dollar was little changed at 109.54 yen. The euro may fall to $1.4570 and 159.90 yen today, Ishikawa forecast.

The euro has weakened 6.1 percent decline against the dollar this month. It has fallen 4.7 percent versus the yen in August, the most since a 5.8 percent drop in March 2004, as a report showed the European economy contracted last quarter.

High Yielder

The Australian dollar bought 85.48 U.S. cents from 85.15 cents in late Asian trading yesterday when it fell to 84.94, the lowest since Sept. 20. It gained to 93.64 yen from 93.54 yesterday as U.S. stocks rebounded from the biggest drop in a month, encouraging so-called carry trades.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the rates. The risk is that currency market moves can erase those profits.

Australia's benchmark interest rate is 7.25 percent, compared with 2 percent in the U.S. and 0.5 percent in Japan.

The greenback has risen against all 16 of the most-traded currencies this month, with gains ranging from a 10.2 percent advance against the Australian dollar to a 1.2 percent increase versus Mexico's peso, as a 20 percent drop in the price of oil from a record bolstered the outlook for the U.S. economy.

The ICE futures exchange's Dollar Index, which compares the greenback against the currencies of six U.S. trading partners, was little changed at 77.261 after reaching 77.619 yesterday, the highest level since Dec. 26.

Inflation Data

Germany's consumer prices rose 3.4 percent in August from a year earlier after a 3.5 percent increase in the previous month, according to the median forecast of 22 economists surveyed by Bloomberg News, when a harmonized European Union method is used. A 0.2 percent monthly decline is forecast. The report from the Federal Statistics Office is due today.

The Ifo institute reported yesterday that its German business confidence index declined this month to the lowest level in three years.

The implied yield on the Euribor futures contract expiring in September 2009 fell 6 basis points, or 0.06 percentage point, to 4.32 percent. The yield averaged 18 basis points above the ECB's benchmark, currently 4.25 percent, from 1999 to August 2007.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net