Dollar Falls as Retail Sales Decline, Wholesale Prices Drop

By Ye Xie and Agnes Lovasz

Sept. 12 (Bloomberg) -- The dollar fell from a one-year high versus the euro after reports showed U.S. retail sales unexpectedly declined in August and prices paid to U.S. producers dropped for the first time this year.

The U.S. currency weakened as traders increased bets that the Federal Reserve will cut borrowing costs in December. The yen slid from a two-year high against the euro as Lehman Brothers Holdings Inc. negotiated with potential buyers, encouraging traders to purchase higher-yielding assets.

``The shift of Fed expectations is meaningful,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``It puts the Fed back into play. It's one factor that may put some floor under the euro-dollar.''

The dollar fell 0.9 percent to $1.4124 at 9:48 a.m. in New York, from $1.3998 yesterday, when it touched $1.3882, the strongest since Sept. 18, 2007. The yen dropped 0.6 percent to 150.92 per euro, from 149.98 yesterday, when it reached 147.54, the highest level since Aug. 11, 2006. The yen increased 0.3 percent to 106.85 per dollar, from 107.17.

Futures on the Chicago Board of Trade showed a 42 percent chance the Fed will cut its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by December, compared with a 35 percent chance yesterday and no chance a month ago. The Fed next meets Sept. 16.

Dollar Index

The ICE's Dollar Index fell for the first time in three days, dropping to 79.277. It touched 80.375 yesterday, the highest level since September 2007, when the Fed began cutting the target lending rate from 5.25 percent to 2 percent to stave off a recession. The index, a gauge measuring the dollar against the currencies of six U.S. trading partners, reached a low of 70.698 on March 17.

Japan's currency decreased 0.7 percent to 15.85 against the Swedish krona and 0.8 percent to 189.88 versus the pound as a potential sale of Lehman encouraged investors to put on trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 4.75 percent in Sweden and 5 percent in the U.K.

Lehman was pushed toward a forced sale after talks about a cash infusion from Korea Development Bank ended, sparking a 70 percent drop in the firm's market value in the past three days.

``There's likely to be a buyer somewhere for Lehman,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``The yen could be sold.''

European Outlook

The euro also rose against the dollar as Luxembourg Finance Minister Jean-Claude Juncker, reappointed to represent finance ministers of the 15 countries that use the currency, said he doesn't expect a prolonged ``recession.'' European Central Bank Vice President Lucas Papademos told reporters in Hamburg late yesterday the economy is likely to escape a recession and there are signs higher energy costs are driving up wages.

Sales at U.S. retailers fell 0.3 percent last month following a revised 0.5 percent drop in July, the Commerce Department reported today. The median forecast of 80 economists surveyed by Bloomberg News was for an increase of 0.2 percent. Producer prices dropped 0.9 percent in August, the Labor Department reported. The median forecast in a separate survey of economists was for a 0.5 percent drop.

The dollar has gained almost 13 percent since touching the all-time low of $1.6038 per euro on July 15 as the European economy slumped and crude oil dropped more than 30 percent from its peak of $147.27.

Industrial output in the 15 nations that use the euro fell 0.3 percent in July, after dropping 0.2 percent in the previous month, the European Union's statistics office said in Luxembourg today. The median forecast of 31 economists surveyed by Bloomberg News was for a drop of 0.2 percent.

Crude oil for October delivery rose for the first time in four days, increasing 1.2 percent to $102.05 a barrel. 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.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net