Dollar Rises to Highest in Almost a Year as Commodities Drop

By Chris Young and Ye Xie

Sept. 11 (Bloomberg) -- The dollar rose to the highest in almost a year against the euro as a drop in crude oil prices reduced the burden on U.S. consumers.

A gauge measuring the dollar against the currencies of six U.S. trading partners recouped losses from when the Federal Reserve began cutting the target lending rate a year ago. The New Zealand dollar dropped to its lowest level since October 2006 after the central bank Governor Alan Bollard cut the benchmark interest rate by more than economists expected.

``The overall drivers of the foreign exchange markets are positive for the U.S. dollar,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. ``Certainly commodity prices are part of the stronger dollar.''

The U.S. currency climbed to $1.3953 per euro, the strongest since Sept. 19, 2007, before trading at $1.3965 as of 7:23 a.m. in Tokyo, from $1.3998 late yesterday in New York. The dollar was little changed at 107.74 yen. Japan's currency was at 150.50 per euro from 150.75 yesterday when it touched 150.16, the strongest since Aug. 17, 2007. The dollar will strengthen to $1.3830 per euro in coming weeks, Trinh said.

The ICE's Dollar Index touched 80.16, the highest since September 2007, when the U.S. central bank began cutting the target rate for overnight lending between banks from 5.25 percent to 2 percent to avoid a recession. The index reached a low of 70.698 on March 17.

Crude oil futures fell to a five-month low yesterday, touching $101.36, after a report showed U.S. supplies increased, while gold futures for December delivery dropped 4.2 percent to $758.40 an ounce. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

`Vote of Confidence'

The ``price action is an unequivocal vote of confidence for the U.S. dollar,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration. ``Crude oil drifting back down again is favorable. The market is taking some comfort here.''

The New Zealand dollar dropped to as low as 65.16 U.S. cents before trading at 65.19 cents, down 2.4 percent from late Asian trading yesterday. The Reserve Bank of New Zealand cut its benchmark interest rate by half a percentage point to 7.5 percent, saying the economy is in a recession.

South African Rand

The rand was little changed at 8.1985 per dollar after yesterday losing as much as 2.6 percent to 8.2265, the weakest since March 24. The country produces about 10 percent of the world's gold, which reached a 10-month low.

The euro has dropped almost 12 percent from the all-time high of $1.6038 in mid-July on evidence the economy of the 15 nations that use the currency is slowing.

The currency is still ``overvalued,'' and Europe faces ``a risk of a technical recession,'' Luxembourg Finance Minister Jean-Claude Juncker said yesterday at a hearing before the European Parliament's economic and monetary affairs committee.

The economy will probably stagnate this quarter after shrinking in the previous three months for the first time since the euro was introduced in 1999, the European Commission said. It cut its forecast for economic growth to 1.3 percent this year, from 1.7 percent earlier, and signaled the 2009 outlook may also be lowered.

Implied volatility on the dollar versus the most actively traded currencies was at 11.6 percent today after touching 12 percent yesterday, the highest since April. The gauge of perceived price fluctuation in the dollar reached 9.27 percent on Aug. 4, the lowest this year.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net