Dollar Climbs to Six-Month High Against Euro as Oil Price Falls

By Stanley White

Sept. 2 (Bloomberg) -- The dollar rose to its highest level since February against the euro on speculation oil prices near a four-month low will support economic growth in the U.S., the world's largest energy consumer.

The U.S. currency advanced to its strongest level in more than two years versus the British pound as Hurricane Gustav weakened before making landfall in Louisiana. The Australian dollar fell to the lowest in almost a year versus the greenback after the country's central bank cut interest rates for the first time since 2001 and said economic growth will slow.

``The decline in oil and weak economic activity in Europe are contributing to the dollar's rise,'' said Satoru Ogasawara, foreign-exchange analyst and economist in Tokyo at Credit Suisse Group, the second-largest Swiss bank. ``Should oil continue to fall, it would mean lower energy costs for U.S. manufacturers and increased purchasing power for U.S. consumers.''

The U.S. currency rose to $1.4556 per euro, the highest since Feb. 14, as of 7:31 a.m. in London from $1.4617 late yesterday in New York. The dollar advanced to $1.7863 versus the pound, the strongest since April 2006. It was little changed at 108.02 yen. The euro was quoted at 157.24 yen from 157.95 yen. The dollar may move between $1.42 and $1.52 per euro in the next month, Ogasawara said.

The Australian dollar fell to 84.45 U.S. cents from 85.29 cents late yesterday in Asia. It earlier touched 84.35 cents, the lowest since September last year, after the Reserve Bank of Australia lowered the overnight cash rate target by a quarter- percentage point to 7 percent, a decision forecast by 22 of 23 economists surveyed by Bloomberg News.

Rate Cuts

The U.S. currency was bolstered by speculation the Federal Reserve's seven rate cuts in the past year will help the world's biggest economy recover from a slump. Investors bought four times as many dollars in August as the average over the previous 12 months, according to Bank of New York Mellon, a custodian for more than $23 trillion in assets.

``The dollar is cheap,'' said Roddy MacPherson, an Edinburgh-based fund manager at Scottish Widows Investment Partnership Ltd., which manages about $165 billion. ``The U.S. has been quite preemptive in bringing rates down and that bodes better for the U.S. relative to many other countries.''

Cheaper oil also boosted the greenback, with crude for October delivery having fallen as much as 4.7 percent since the end of last week to $110.09 a barrel, the lowest since April 14. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

`Increasingly Important'

``Oil is becoming an increasingly important factor for the dollar,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``The dollar could rally further should oil break below $110.''

The dollar may rise to $1.45 versus the euro today, he said.

The yen rose to a three-week high of 74.25 versus the New Zealand dollar and to 192.68 against the pound, the strongest since March 17, on speculation stock market declines will prompt traders to pare holdings of higher-yielding assets funded with Japan's currency. The MSCI Asia-Pacific Index of regional shares fell 1.4 percent.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The risk is currency moves erase the profits. The Bank of Japan's target lending rate is 0.5 percent, compared with 4.25 percent in Europe and 8 percent in New Zealand.

`Yen to Rise'

``The trend is for the yen to rise against the euro, the Australian dollar and other currencies,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank. ``Traders are reevaluating their approach to high-yielding currencies because the monetary policy outlook is changing.''

Japan's currency may rise to 155 versus the euro this month, he said.

Any gain in the yen may be limited after Japanese Prime Minister Yasuo Fukuda resigned yesterday. Taro Aso, a lawmaker from Fukuda's Liberal Democratic Party, is seen as Fukuda's likely successor.

Fukuda quit after less than a year in office, citing deadlock in the parliament. He's the second premier to step down since the ruling LDP lost control of the less-powerful upper house in July 2007 to the Democratic Party of Japan.

Yen Selling

``Over time this may develop into a yen-selling factor,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``There are doubts whether the government can maintain a base to dictate policy and pass legislation, and that's a big uncertainty.''

The pound traded at 81.32 pence per euro, near a record low of 81.64, on speculation the Bank of England will lower interest rates in coming months as the economy slows.

U.K mortgage approvals dropped to the lowest level in nine years and manufacturing contracted, reports showed yesterday, adding to evidence of a looming recession.

The Bank of England will keep interest rates unchanged at 5 percent on Sept. 4, according to a Bloomberg survey. Traders are paring bets on higher borrowing costs in the U.K. The implied yield on the March short-sterling futures contract fell to 5.06 percent yesterday from 5.5 percent at the start of August.

Burden on Sterling

``The fear is that the economic downturn has gained momentum,'' Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``With rate cuts unlikely before the BOE's November meeting, the burden of adjustment is currently falling on sterling.''

The pound may fall to $1.7885 and then $1.7235 in coming days, according to the report.

The Australian dollar may decline to 80 U.S. cents in the next two months, said Kengo Suzuki, a currency strategist at Shinko Securities Co. in Tokyo.

Australia's currency is poised to fall after dipping below a so-called cloud on its weekly ichimoku chart. Support at 80 U.S. cents is near the 76.4 percent retracement of its advance from its October 2006 low of 74.16 cents to its July high of 98.49 cents, according to a series of numbers known as the Fibonacci sequence.

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