Euro Falls Most Versus Dollar in Week as German Sentiment Ebbs

By Bo Nielsen and Lukanyo Mnyanda

June 23 (Bloomberg) -- The euro dropped the most versus the dollar in more than a week as German business confidence fell in June to the lowest level since 2005, reducing speculation the European Central Bank will increase interest rates this year.

The 15-nation euro also declined against the yen as Europe's manufacturing and service industries unexpectedly contracted this month. The Federal Reserve is forecast to hold its target lending rate at 2 percent at its meeting beginning tomorrow. The pound fell versus the dollar and the euro as house prices decreased in June the most this year.

``It's becoming clear that the ECB can't tighten rates aggressively from here,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``That will temper the euro going forward.''

The euro fell 0.8 percent to $1.5483 at 8:41 a.m. in New York, from $1.5606 on June 20. The euro dropped 0.2 percent to 167.24 yen, from 167.54 at the end of last week. The yen fell 0.6 percent to 107.99 per dollar, from 107.33.

The British pound dropped 0.8 percent to $1.9608 after Rightmove Plc, Britain's most-used property Web site, reported that the average asking price for a home dropped 1.2 percent from May to 239,564 pounds ($473,000). Sterling decreased 0.2 percent to 79.11 pence per euro.

The Munich-based Ifo institute said its business-climate index, based on a survey of 7,000 German executives, dropped to 101.3 from 103.5 in May. The median forecast of 42 economists surveyed by Bloomberg News was for a reading of 102.5. It was the lowest reading since December 2005, when it slumped to 99.6.

ECB's `Problem'

``The deceleration in the euro-area economy will continue to be felt, and that leaves the ECB with a problem,'' said Jeremy Stretch, a senior currency strategist in London at Rabobank International, the third-largest Dutch bank. ``The euro will be trading lower in the medium term.''

The European currency may trade between $1.53 and $1.58 through the third quarter and fall to as low as $1.47 by the end of 2008, Stretch said. That compares with a median year-end prediction of $1.50, according to a survey of 47 analysts and economists compiled by Bloomberg.

Royal Bank of Scotland Group Plc's composite index of manufacturing and services industries fell to 49.5 this month from 51.1 in May. It's the first time the gauge dropped below 50, which indicates contraction, in five years.

The dollar has gained 1.7 percent against the euro this quarter as traders bet the economic slowdown sparked by the collapse of the subprime-mortgage market will spread to Europe as the U.S. recovers.

Bernanke on Economy

Fed Chairman Ben S. Bernanke said this month economic risk has faded, prompting investors to bet the central bank will increase interest rates later this year after seven reductions beginning in September. All of the 98 economists surveyed by Bloomberg News predict the central bank hold the fed funds target steady on June 25.

A S&P/Case-Shiller report tomorrow will show home prices in 20 U.S. metropolitan areas dropped 16 percent in April from a year earlier, the most since records were first published in 2001, according to the median forecast of 20 economists surveyed by Bloomberg News.

Investors reduced wagers on additional rate increases by the ECB this year, futures contracts showed. The implied yield on the December Euribor futures contract dropped 2 basis points to 5.28 percent, the lowest since June 4. The contract has gained 29 basis points this month.

European Rates

``We are pricing rate in rate rises in the euro zone, but they are going to be a bit slower than the market expects,'' Chris Furness, London-based head of currency strategy at 4Cast Ltd., a research company that counts central banks among its subscribers, said in a Bloomberg Television interview.

China's yuan touched the highest since a dollar link ended in 2005, pushing its gain this year to 6.3 percent, as the central bank seeks to combat inflation. China raised gasoline and diesel prices at least 17 percent last week.

The currency climbed as much as 0.2 percent to 6.8698 per dollar, according to the China Foreign Exchange Trade System. It has risen 2 percent this quarter, the best performer among the 10 most-traded currencies in Asia outside Japan.

To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.

Last Updated: June 23, 2008 08:43 EDT