Dollar Falls on Speculation Oil Gains to Weaken U.S. Economy

By Stanley White

Sept. 1 (Bloomberg) -- The dollar fell to the lowest in more than a week against the yen on speculation a rise in oil prices will harm the economic outlook for the world's largest energy consumer.

The dollar declined against the euro as Hurricane Gustav approached the Gulf of Mexico, halting most oil and natural gas output from the region. The British pound fell to a record low against the euro and the weakest in two years versus the dollar after Chancellor of the Exchequer Alistair Darling said the British economy faces the worst slump in 60 years.

``The dollar's move is related to the news on Gustav,'' said Takeshi Iba, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of Brown Brothers Harriman. ``A rise in oil prices can temporarily push the dollar lower.''

The dollar fell to 108.21 yen, the lowest since Aug. 21, before trading at 108.45 yen at 8:47 a.m. in Tokyo from 108.80 yen in New York on Aug. 29. Against the euro, the dollar slid to $1.4697 from $1.4673. The euro bought 159.40 yen from 159.65 yen. The dollar may decline to 108 yen this week, Iba forecast.

The pound declined to 81.39 pence per euro, the lowest since the single European currency's debut in 1999, before trading at 81.10 pence. It also declined to $1.8083, the lowest since April 2006, and traded at $1.8117 from $1.8211.

Crude oil for October delivery rose 1.3 percent to $117.00 a barrel. Prices are up 22 percent this year. 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.

`Bit of Pain'

``If we do go above $120 a barrel and hold that for several days, that would create a little bit of pain for the U.S. dollar,'' John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney, said in an interview with Bloomberg Television.

An economic downturn in the U.K. due to a housing slump would be ``profound and long-lasting,'' Darling said in an interview with the Guardian newspaper on Aug. 30. The next day Darling said he was referring to global conditions rather than those in Britain, the Sunday Telegraph reported, citing television interviews.

The pound also declined as U.K. house prices fell by the most since at least 2001 in August, according to a report released today by Hometrack Ltd.

The Bank of England will keep interest rates unchanged at 5 percent on Sept. 4, according to a Bloomberg News survey of economists. Traders are paring bets on higher borrowing costs in the U.K. The implied yield on the March short-sterling futures contract fell to 5.185 percent on Aug. 29 from 5.45 percent at the end of July.

``Darling painted a pretty dismal picture of the U.K. economy, prompting some speculation of a rate cut,'' said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. ``Sterling is at a record low against the euro now, so we're in uncharted territory.''

The pound may fall to $1.80 in coming weeks, she said.

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