Euro Falls Against Dollar Before Reports on European Spending

By Stanley White

Sept. 3 (Bloomberg) -- The euro fell to the lowest in more than seven months against the dollar before reports that will probably show European consumers are spending less as the economy contracts.

The 15-nation currency approached the lowest in five months versus the yen on speculation the European Central Bank will signal concern about the region's economy this week. The pound traded near a two-year low against the dollar on concern the U.K. is heading for a recession as house prices plunge. The South Korean won declined to the weakest in four years on speculation international investors are selling the country's assets.

``The euro and pound will continue to be sold,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``The outlook for European economies has deteriorated a lot in a very short time span. It's only natural to speculate about when officials will have to lower rates.''

The euro declined to $1.4412, the lowest since Jan. 22, before trading at $1.4430 as of 8:21 a.m. in London from $1.4520 yesterday. It may drop to $1.44 today, Amikura said. The dollar was at 109.03 yen from 108.61 yen. The pound dropped to $1.7703, the lowest level since April 2006. The euro traded at 157.34 yen from 157.68 yen.

The South Korean won declined to a four-year low of 1,159.05 per dollar before closing at 1,148.55 from 1,133.75 yesterday. UBS AG and ABN Amro Bank NV predicted further declines in the currency, Asia's worst performer, as overseas investors will keep selling the nation's assets.

European Retail

European retail sales fell 2.1 percent in July from a year earlier, after a record 3.1 percent decline the previous month, according to the median forecast of 18 economists surveyed by Bloomberg News. The European Union's statistics office, which started to compile the data in 1995, is scheduled to release the report at 11 a.m. today in Luxembourg.

Revised data today may confirm that the euro zone economy shrank 0.2 percent in the second quarter, the first contraction since the euro's debut in 1999.

The U.S. currency surged 6 percent versus the euro in August, its biggest monthly gain since the European currency started trading in 1999. The economies of Europe and Japan shrank in the second quarter, while U.S. gross domestic product expanded at a 3.3 percent annual pace.

The European Central Bank will hold its main refinancing rate at a seven-year high of 4.25 percent at its meeting tomorrow, according to all but one of the 53 analysts surveyed by Bloomberg News.

`Grind Lower'

``The euro seems poised to grind lower,'' said Mitsuru Sahara, senior currency sales manager in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly listed lender. ``Higher-yielding currencies are losing their luster because the economic outlook suggests interest rates in several countries are going to start falling.''

The euro may decline to $1.4430 today, he said.

Federal Reserve Chairman Ben S. Bernanke has gone from a dollar liability to an asset, sparking a rally that even bears say shows few signs of ending.

While the U.S. Dollar Index fell to a record low in March as the Fed cut interest rates at the fastest pace in two decades, traders now anticipate lower borrowing costs will help America recover from a global economic slowdown before Asia or Europe. Investors bought four times as many dollars in August as the average over the previous 12 months, according to Bank of New York Mellon, a custodian for more than $23 trillion in assets.

Forecast Change

Standard Chartered Plc and BNP Paribas SA raised their forecasts for the U.S. currency yesterday. London-based Standard Chartered predicts the dollar will rise to $1.44 per euro by year-end and $1.36 by March 31, compared with previous forecasts of $1.49 and $1.42. BNP, based in Paris, forecasts the dollar will gain to $1.42 versus the euro and $1.71 against the pound by year-end, stronger than the old forecasts of $1.45 and $1.88.

The dollar rose against the yen on speculation a decline in oil prices will support economic growth in the world's largest energy consumer.

Crude oil for October delivery fell 0.7 percent to $108.90 a barrel, near a five-month low of $105.46 reached yesterday.

``The dropping commodity prices tend to benefit the dollar,'' said Magnus Prim, chief foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``Even without that, focus has shifted to the weakness in the euro area. That hasn't fully been priced in yet.''

`Sterling Struggling'

The pound was at 81.47 pence per euro, near a record low of 81.64 pence reached yesterday. U.K. consumer confidence stayed at a four-year low in August, according to the findings of a survey published today by Nationwide Building Society, the nation's second-biggest mortgage lender. The Bank of England will keep its target lending rate unchanged at 5 percent tomorrow, according to all of the 61 economists surveyed by Bloomberg News.

U.K. inflation will reach about 5 percent in coming months and may slow to below the central bank's 2 percent target in two years if the benchmark rate remains unchanged, BOE Governor Mervyn King said Aug. 13.

``Sterling is struggling to shore up support ahead of the BOE meeting,'' analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist at UBS AG, the world's second-largest currency trader, wrote in a research note yesterday. ``Sterling weakness will continue while the BOE remains trapped by above- target inflation.''

Nonfarm Payrolls

Gains in the dollar may be limited by speculation a weakening U.S. labor market will damp consumer spending.

U.S. nonfarm payrolls fell by 75,000 jobs in August, faster than the previous month's decline of 51,000, according to the median estimate in a Bloomberg News survey before the Labor Department releases the report Sept. 5.

``I don't think the U.S. fundamentals at all support the idea of a stronger U.S. dollar going into next year,'' said Clifford Bennett, chief economist at Sonray Capital Markets Ltd., in an interview with Bloomberg Television. ``The dollar is going to turn around at some point.''

The euro's decline through $1.4555, an extension of a decline from a ``double top,'' signaled the European currency may fall to $1.4310, a level last reached in December, wrote Kevin Edgeley, an analyst at Goldman Sachs Group Inc. in London who uses charts to predict currency movements, in a research note yesterday.

A double top occurs when a currency makes two successive peaks, often indicating a trend's reversal. The euro reached $1.6019 on April 22, dropped to a two-month low of $1.5285 on May 8, and rose to the record of $1.6038 on July 15.

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