Dollar Falls to One-Week Low Before U.S. Manufacturing Report

By Kosuke Goto and Stanley White

June 19 (Bloomberg) -- The dollar declined to a one-week low against the euro on speculation a Federal Reserve report today will show a contraction in U.S. manufacturing, encouraging the central bank to delay increasing interest rates.

The U.S. currency held near a one-week low versus the Australian and New Zealand dollars on concern credit market losses and record oil prices will prolong a U.S. economic slowdown. The Swiss franc rose to the highest since 1991 against the yen as the central bank will leave interest rates unchanged at a six-year high today, according to a Bloomberg News survey.

``Today's manufacturing data may prompt yet more dollar selling,'' said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second-largest publicly traded financial group. ``With the U.S. economy still slowing, the Fed cannot raise rates this year.''

The dollar fell to $1.5572 per euro as of 12:30 p.m. in Tokyo, compared with $1.5535 in New York yesterday. It reached $1.5579, the lowest level since June 11. The U.S. currency slid to 107.66 yen from 107.88. The euro traded at 167.59 yen from 167.58 yesterday, when it touched 168.04, the highest since July 23.

The U.S. currency may fall to $1.5590 a euro and 107.20 yen today, Kato forecast.

Manufacturing in the Philadelphia area of the U.S. probably contracted for the seventh month in June. The Federal Reserve Bank of Philadelphia's general economic index will probably be at minus 10, from minus 15.6 in May, according to a Bloomberg News survey of economists before today's report.

Asian Currencies

China's yuan rose to 6.8762 per dollar, the strongest since a dollar link was scrapped in 2005, after U.S. Treasury Secretary Henry Paulson urged China to let markets play a bigger role in setting the currency's value. The South Korean won climbed to 1,026.70 per dollar from 1029.10 on speculation the central bank will buy the currency to contain inflation at a seven-year high.

The dollar rose 2.6 percent against the euro last week, the most since 2005, as Fed Chairman Ben S. Bernanke said economic risks have faded, prompting investors to bet the central bank will raise interest rates later this year.

Carry Trades

The yen and the Swiss franc strengthened as Morgan Stanley's earnings dropped 57 percent, renewing concern credit market losses will deepen. A drop in stocks led traders to reduce investments in higher-yielding assets funded in Japan and Switzerland, a practice known as carry trades. In such trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher.

Japan's target lending rate of 0.5 percent and Switzerland's 2.75 percent rate compares with 7.25 percent in Australia and 8.25 percent in New Zealand. European Central Bank President Jean-Claude Trichet said on June 5 that the bank may raise its 4 percent main refinancing rate in July.

``A heightened sense of risk aversion is coming back into the markets,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``There seems to be a general move back into the safe havens.''

Japan's currency advanced to 101.93 yen per Australian dollar from 102.17 in New York. It also gained to 81.67 yen per New Zealand dollar from 81.89, as the MSCI Asia Pacific Index of regional shares declined 1.6 percent. The Swiss franc rose to 104.28 yen, the highest since February 1991, and climbed to 1.0331 per dollar, the strongest since June 12, from 1.0361 yesterday.

Swiss Franc

The Swiss central bank will probably leave its main lending rate unchanged at 9:30 a.m. local time as slowing growth limits policy makers' room to combat inflation, according to 16 of 25 forecasts in a Bloomberg News survey. The rest of them expect the central bank to raise borrowing costs.

``We expect the Swiss National Bank will raise rates today,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp., the second-largest in the U.S. ``The nation's inflation rate is very high. The franc will rise to 1.030 against the dollar by the end of September.''

Investors should buy the franc against the dollar as financial market losses boost the currency, according to Morgan Stanley, the second-biggest securities firm by market value.

``Given the overhang of uncertainty and the continued choppiness in global asset markets, we believe there is value in keeping some defensive plays,'' Morgan Stanley currency strategists Sophia Drossos and Yilin Nie wrote in a research note yesterday. Morgan Stanley bought francs for dollars in its model portfolio with a target of 0.9850 and automatic sell order at 1.05 to limit losses, according to the report.

Fed Rate Outlook

The U.S. Dollar Index traded on the ICE futures, which tracks the greenback against the currencies of six U.S. trading partners, fell for a fourth day to 73.278.

Traders reduced bets that the Fed will raise borrowing costs at its policy meeting next week. Futures on the Chicago Board of Trade show a 14 percent chance policy makers will increase the 2 percent target rate for overnight lending between banks by a quarter-percentage point on June 25, compared with 16 percent odds a day earlier.

The dollar has traded in a range of $1.5300 to $1.5850 against the euro since the beginning of May. It will rise to $1.50 by year-end, according to the median forecast of 39 analysts surveyed by Bloomberg News.

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: June 18, 2008 23:42 EDT