Dollar Rises to Highest in Almost Seven Months on Oil, Fed Cuts

By Ye Xie and Agnes Lovasz

Sept. 2 (Bloomberg) -- The dollar rose to the highest level against the euro in almost seven months as oil fell and Federal Reserve rate cuts raised speculation that the U.S. economy will outperform Europe and Asia.

The pound fell to a two-year low versus the greenback on evidence a recession in the U.K. is looming. Australia's dollar fell to the weakest level in almost a year after the country's central bank cut interest rates for the first time since 2001 and said economic growth will slow.

``Lower oil and a stronger dollar have reinforced each other,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

The dollar increased 0.7 percent to $1.4516 per euro at 10:07 a.m. in New York, from $1.4617 yesterday. It touched $1.4467, the strongest level since Feb. 8. Standard Chartered raised its forecast for the dollar to $1.44 per euro by year-end and $1.36 by the end of the first quarter, compared with previous forecasts of $1.49 and $1.42. The U.S. currency rose 0.9 percent to 109.13 yen, from 108.14 yesterday. The euro advanced 0.3 percent to 158.45 yen, from 157.95.

The greenback's 6 percent gain versus the euro in August was its biggest monthly advance since the 15-nation currency was introduced in 1999. Investors bought four times as many dollars in August compared with the average over the previous 12 months, according to Bank of New York Mellon Corp., a custodian of more than $23 trillion in assets.

`Dollar Is Cheap'

``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.''

The Fed has cut the target rate for overnight lending between banks seven times from 5.25 percent in September 2007 to 2 percent. Policy makers next meet Sept. 16.

Central bank policy makers agreed in August that their next change in interest rates will be to raise them, while reaching no conclusion on the timing of such a decision, according to minutes of their Aug. 5 meeting released last week.

The Institute for Supply Management's factory index fell to 49.9 last month from 50.0 the prior month, the Tempe, Arizona- based group reported today. The ISM gauge has hovered near 50, the dividing line between expansion and contraction, for the past year.

The ECB will hold its main refinancing rate at a seven-year high of 4.25 percent at its meeting Sept. 4, according to all but one of the 53 analysts surveyed by Bloomberg News. Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, forecasts a cut of a quarter-percentage point.

Weaker Pound

The pound fell as much as 1.3 percent to $1.7783, the lowest level since April 2006. U.K. mortgage approvals dropped to the lowest level in nine years and manufacturing contracted, reports showed yesterday. The pound depreciated as much as 0.6 percent to 81.64 pence per euro, the weakest since the European currency's debut.

The Bank of England will keep the target lending rate unchanged at 5 percent on Sept. 4, according to all of the 61 economists surveyed by Bloomberg News.

The ICE futures exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose as much as 0.9 percent to 78.310 today, the highest level since October.

Crude oil for October delivery fell today as much as 8.7 percent to $105.46 a barrel, the lowest level since April. 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.

Dollar and Oil

``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.''

BNP Paribas SA currency strategist Ian Stannard raised his year-end forecasts for the dollar against the euro and the pound. He said the dollar will rise to $1.42 versus the 15- nation euro and $1.71 against the pound by year-end, compared with his earlier prediction of $1.45 and $1.88.

The Australian dollar fell as much as 2.8 percent to 82.70 U.S. cents, the lowest level since September 2007, after the Reserve Bank of Australia lowered the overnight cash target rate by a quarter-percentage point to 7 percent.

The Aussie may decline to 80 U.S. cents in the next two months after dipping below a so-called cloud on its weekly ichimoku chart, said Kengo Suzuki, a currency strategist at Shinko Securities Co. in Tokyo.

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