Dollar Rises to One-Year High Against Euro on Growth Outlook

By Ye Xie and Agnes Lovasz

Sept. 11 (Bloomberg) -- The dollar rose to the highest level in a year against the euro on speculation economic growth in Europe will be slower than in the U.S., prompting the European Central Bank to lower interest rates.

New Zealand's currency dropped to two-year lows against the dollar and the yen as the Reserve Bank reduced borrowing costs more than most economists forecast. The yen advanced to the highest level against the euro since September 2006 on concern a global slowdown will lead investors to reduce holdings of higher-yielding assets and pay back loans in Japan's currency.

``Risk aversion is feeding into the dollar rally right now,'' said Mike Moran, a senior currency strategist at Standard Chartered in New York. ``Investors are increasingly concerned about the backdrop for the rest of the world in the next three, six months.''

The U.S. currency climbed 0.6 percent to $1.3917 per euro at 9:26 a.m. in New York, from $1.3998 yesterday. It touched $1.3893, the strongest level since Sept. 18, 2007. The yen advanced 1.9 percent to 147.85 per euro, from 150.75, after touching 147.71, the strongest in two years. The yen gained 1.4 percent to 106.24 per dollar, from 107.70.

The ICE's Dollar Index touched 80.375 today, the highest level since September 2007, when the Federal Reserve began cutting its 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.

ECB Rate Outlook

The ECB will cut its main refinancing rate by a quarter- percentage point to 4 percent during the first three months of next year, according to Bloomberg surveys of economists.

The European Commission said yesterday the euro region's economy will probably stagnate this quarter after shrinking the previous three months for the first time since the currency's debut in 1999. It cut its 2008 growth forecast to 1.3 percent, from 1.7 percent. By contrast, the median in a Bloomberg News survey of economists was for U.S. growth of 1.7 percent.

The yen gained against all of the other major currencies on speculation investors will reduce carry trades, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. The yen rose 3.5 percent to 58.14 versus the Brazilian real and 2.7 percent to 12.77 against the South African rand. Japan's target lending rate of 0.5 percent compares with 13.75 percent in Brazil and 12 percent in South Africa.

`Risk-Aversion Mode'

``Investors in Japan are in risk-aversion mode, so they're buying the yen,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG.

The New Zealand dollar, known as the kiwi, fell as much as 2.7 percent to 64.38 U.S. cents, the lowest since September 2006, and 3.7 percent to 68.99 yen, the weakest since May 2006. The Reserve Bank cut its official cash rate by a half-percentage point to 7.5 percent, saying the economy is in a recession and inflation will slow.

The yen gained for a fourth day against the euro after implied volatility on one-month euro options versus the yen rose to 16.94 percent, the highest since March 18.

The Australian dollar dropped to the lowest against the U.S. currency since August 2007 on tumbling prices of raw materials, which account for about 60 percent of the nation's exports. The Aussie fell as much as 1.4 percent to 79.01 U.S. cents and dropped 2.2 percent to 84.44 against the yen.

Platinum for immediate delivery fell as much as 4.2 percent to $1,130.65 an ounce in London, the lowest since Jan. 12, 2007, while gold dropped 1.3 percent to $742.40 an ounce.

European Output

Industrial output in the 15 nations that use the euro probably fell 0.2 percent in July after a decline by the same amount in June, according to the median forecast of 31 economists surveyed by Bloomberg News. The report from the European Union's statistics office is due tomorrow.

``The euro is likely to extend its adjustment lower,'' said Saburo Matsumoto, senior manager of foreign-exchange sales in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest publicly traded bank by market value. ``The euro-zone economy is facing a recession, so a weaker currency could provide some relief to exports.''

Implied volatility on the dollar versus the most actively traded currencies was at 11.55 percent after touching 12 percent, the highest since April, according to the JPMorgan Volatility index. The gauge of perceived price fluctuation in the dollar reached 9.27 percent on Aug. 4, the lowest this year.

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