Euro Weakens to 5-Month Low on Conflict Between Russia, Georgia

By Stanley White
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Aug. 11 (Bloomberg) -- The euro fell to a five-month low against the dollar as fighting between Russia and Georgia spread to a second front, raising concern about stability in Europe.

The 15-nation currency also declined to a two-month low versus the yen as armed conflict heated up in Georgia's separatist Abkhazia region after Russian troops took control of the breakaway province of South Ossetia. The New Zealand dollar traded near an 11-month low and Australia's close to its weakest in six months as the fighting in Georgia prompted traders to pare holdings of higher-yielding investments.

``Traders will look for opportunities to exit bets on euro strength,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``This conflict pits Europe versus Europe, and that will discourage people from holding the euro. Risk aversion will also weigh on sentiment.''

The euro fell to $1.4907 per dollar, the lowest since Feb. 26, before trading at $1.4955 as of 7:38 a.m. in London, from $1.5005 late Aug. 8 in New York. The euro weakened to 164.60 yen from 165.38 late last week. It earlier touched 163.65 yen, the lowest since June 5. The dollar was little changed at 110.07 yen.

The euro may fall to $1.4650 this month, Soma forecast.

New Zealand's currency bought 70.08 U.S. cents from 70.45 cents late last week, after reaching 69.82 cents, the weakest since Sept. 11, 2007. Australia's dollar was at 88.60 U.S. cents from 88.85. It touched 88.37 cents, the lowest since Jan. 31.

Lower Rates

The Australian currency extended three weeks of losses after the nation's central bank reiterated that it may lower interest rates in its quarterly statement on monetary policy. Central bank Governor Glenn Stevens said last week there was ``scope to move toward a less restrictive stance of monetary policy'' because of slowing consumer demand.

South Korea's won fell for a third day, losing 0.4 percent to 1,031.80 per dollar, on speculation the government will use monetary policy instead of a stronger currency to slow inflation. The Bank of Korea unexpectedly raised its benchmark interest rate on Aug. 7 to an eight-year high of 5.25 percent.

The Singapore dollar slumped to a five-month low of S$1.4102 versus the greenback after a government report today showed the economy expanded at the slowest pace in five years last quarter.

Russian troops entered Ossetia on Aug. 8 in what it said was a response to Georgia's assault on Russian citizens. Georgia withdrew its troops from South Ossetia yesterday after Georgian casualties rose ``into the hundreds,'' Interior Ministry spokesman Shota Utiashvili said.

Death Toll

Russian officials confirmed the withdrawal and put the death toll at more than 2,000, many of them Russian citizens. Most residents of South Ossetia hold Russian passports. Georgia's push to join the North Atlantic Treaty Organization has made it a flashpoint in Russia's relations with the West. The U.S. strongly backs the bid, while Russia considers further eastward expansion of NATO a security threat.

Crude oil rose $1.05 to $116.25 a barrel on concern the conflict may disrupt oil supplies in the Caspian Sea. The cost of oil, which reached a record $147.27 on July 11, has surged 63 percent in the past year.

Gains in the dollar may be limited by speculation the world's largest economy will slow as high energy prices crimp consumer spending.

Sales at U.S. retailers fell 0.1 percent in July after rising 0.1 percent in the previous month, according to the median estimate in a Bloomberg News survey. The Commerce Department will release the data on Aug. 13.

Industrial Production

The Federal Reserve will say on Aug. 15 that industrial production was unchanged in July after rising 0.5 percent the prior month, according to a separate Bloomberg survey.

The dollar's 4 percent surge against the single European currency this month was enough to prompt Bank of America Corp. to tell its customers to exit trades betting on more gains. Morgan Stanley still forecasts the greenback will approach a record low by October as the U.S. housing slump and credit- market losses keep the Fed from raising interest rates this year.

That's mostly because there's no indication the U.S. will return to the late 1990s annualized gross domestic product growth of 4.23 percent with inflation running at no more than 3.3 percent. Since September 2000, the dollar has declined more than 44 percent as inflation accelerated to an annual 5 percent rate, growth slowed to 1.9 percent and U.S. interest rates provide no cushion for holding U.S. assets.

Dollar Rebound

``I would not chase the dollar's strength versus the euro as the pair has moved beyond interest-rate support,'' said Sophia Drossos, a strategist in New York at Morgan Stanley, who also recommended closing out bets on the dollar versus the currencies of Malaysia and Singapore. ``The dollar is not out of the woods. It will take the market a while to come around to our point of view.''

U.S. Treasury Secretary Henry Paulson said there are no plans to use his new authority to inject capital into mortgage companies Fannie Mae and Freddie Mac, which both posted worse- than-expected earnings last week.

``We have no plans to insert money into either of those two institutions,'' Paulson said in an interview with NBC's ``Meet the Press'' broadcast yesterday from Beijing. He added that their earnings results were ``not a surprise.''

Paulson and Congress last month brokered a plan to bolster the two government-sponsored enterprises that includes giving the Treasury the right to buy their shares. Fannie and Freddie, which account for almost half of the $12 trillion mortgage market, reported losses three times worse than estimated, prompting some analysts to predict that Paulson will have to act.

``Paulson's comments may weigh on the dollar,'' said Akio Shimizu, chief manager of foreign-exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``There may not be enough confidence in the mortgage lenders to assume they can survive without public funds.''

The dollar may decline to 109.40 yen today, he said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net.