By Bo Nielsen
April 26 (Bloomberg) -- The dollar rose the most against the euro in a month as traders increased bets that the Federal Reserve may stop cutting interest rates at its meeting next week and the European economy showed signs of a slowdown.
After climbing above $1.60 for the first time on April 22, the euro logged the biggest three-day decline since 2005 as German and French business confidence dropped. European Central Bank policy makers said the 15-nation currency's strength is undermining growth, casting doubt on the bank's resolve to hold borrowing costs at a six-year high.
``The dollar will continue to rebound,'' said Benedikt Germanier, an analyst at UBS AG in Stamford, Connecticut. ``The Fed has the bulk of its easing behind it, while the ECB has the bulk of its easing ahead of it,''
The dollar rose 1.2 percent to $1.5630 per euro this week, from $1.5817 on April 18. It touched $1.6019 on April 22, the weakest level since the euro's launch in 1999. The dollar rose 0.7 percent to 104.42 yen, from 103.67. The euro dropped 0.5 percent to 163.15 yen, from 163.96.
The yen fell for the second consecutive week against the dollar after a government report showed yesterday that Japan's core consumer prices increased 1.2 percent in March from a year earlier, the most in a decade. Japan's five- year notes had their biggest slump in almost nine years yesterday as traders increased speculation that the Bank of Japan will lift its 0.5 percent target lending rate.
Stronger Rand
South Africa's rand was the biggest gainer versus the dollar this week, rising 2.2 percent to 7.6167, as traders bet that policy makers will lift the 11.50 percent target lending rate. Governor Tito Mboweni said yesterday that the central bank may call an emergency meeting on accelerating inflation.
The Canadian dollar weakened after policy makers reduced the key lending rate by a half-percentage point to 3 percent on April 22 and signaled they may cut borrowing costs further. The Canadian currency fell 1 percent to C$1.0136 per U.S. dollar.
The 15-nation euro fell 2.4 percent against the dollar in three days after reaching the record on April 22, the biggest decline since June 2005. The euro has risen 7 percent against the dollar this year.
Fed Rate Outlook
Munich-based Ifo's German business climate index, based on a survey of 7,000 executives, fell to 102.4, from 104.8 in March, the institute reported April 24. An index of sentiment among 4,000 French manufacturers slid to 106 in April from a revised 108 in March, the Paris-based national statistics office said the same day.
At the same time, the dollar strengthened as traders increased speculation that the Fed will end a series of rate cuts that began in September.
Futures on the Chicago Board of Trade showed yesterday a 22 percent chance that the Fed will hold the target rate for overnight lending at 2.25 percent on April 30, compared with 2 percent odds a week ago. There was a 78 percent chance policy makers would cut by a quarter-percentage point.
The yield advantage of two-year German government bunds over comparable-maturity Treasuries decreased 0.27 percentage point to 1.43 percentage points, from 1.70 last week, making euro-denominated assets less attractive. It's the biggest narrowing since June 2001.
ECB and Oil
``The move in the euro-dollar has been driven by the change in U.S. rate expectations,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``When the euro falls, it tends to come off hard.'' The U.S. currency may strengthen to $1.5450 per euro before the Fed's meeting next week, he said.
The euro touched the record earlier in the week as investors raised bets on an ECB rate increase this year and the price oil surged past $119 a barrel. ECB governing council member Christian Noyer said on April 22 that policy makers will act to restrain consumer prices if inflation doesn't slow.
``Our big problem is to make sure that inflation falls back below 2 percent next year,'' the French central bank head said in an interview on RTL radio. ``If needed, we'll move rates.''
Lose Momentum
The euro pared gains after the Wall Street Journal reported Noyer later said his comments had been over- interpreted. Losses accelerated after ECB President Jean- Claude Trichet said in Frankfurt on April 24 that the euro's surge to a record against the dollar may hurt Europe's economy.
Some analysts said the dollar's rally will lose momentum. Bank of America Corp., the second-biggest U.S. bank by assets, advised clients to sell the dollar and buy the euro. The firm said in a note yesterday that the dollar will weaken to $1.6250 after the Fed's rate decision and the Labor Department's May 2 jobs report, which is forecast to show payrolls contracted in April for a fourth straight month.
``We have gone from a situation where the market was excessively pessimistic about the U.S. to perhaps a little bit complacent about what comes next,'' said Robert Sinche, head of global currency strategy at Bank of America in New York.
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