Dollar Falls From One-Week High Against Euro as Stocks Drop

By Ye Xie and Candice Zachariahs

July 7 (Bloomberg) -- The dollar fell from a one-week high against the euro as concern credit market losses will deepen pushed U.S. stocks down.

South Korea's won rose against all of its major counterparts after the government pledged ``stern action'' to stabilize the local currency. President George W. Bush, in Japan for the Group of Eight summit, reiterated support yesterday for a ``strong'' U.S. currency.

``The dollar is hit by the risk aversion scare,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``There's still tremendous concern about the quality of the financial system.''

The U.S. currency dropped 0.3 percent to $1.5745 per euro at 1:40 p.m. in New York, from $1.5706 on July 4. It touched $1.5611, the strongest level since June 25. The yen traded at 106.77 per dollar, compared with 106.80. Japan's currency fell 0.2 percent to 168.10 versus the euro, from 167.73.

The Standard & Poor's 500 Index dropped 1.3 percent after increasing as much as 0.8 percent. Fannie Mae and Freddie Mac, the two largest U.S. providers of financing for home loans, tumbled on speculation banks were unloading more mortgage bonds. JPMorgan Chase & Co. and Citigroup Inc. retreated.

An accounting change may force Fannie Mae to add $46 billion of capital and Freddie Mac to add $29 billion, Lehman Brothers Holdings Inc. analysts said in a report today.

South Korean Won

The South Korean won strengthened after the Ministry of Finance and the Bank of Korea stepped up their rhetoric by saying they will use the country's $258 billion in reserves to boost the currency. South Korean President Lee Myung-Bak sacked Vice Finance Minister Choi Joong Kyung, who was in charge of the government's foreign-exchange policy. The won climbed 0.7 percent to 1,042.90 per dollar, from 1,050.35 on July 4.

The dollar rose earlier versus the euro on speculation U.S. officials will try to stem gains in oil prices as the G-8 summit gets under way in Japan. Leaders from Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S. are meeting for three days. Central bankers aren't attending the meeting.

Bush said yesterday on the first day of his five-day trip to Japan that the U.S. ``believes in a strong-dollar policy.'' The U.S. economy remains fundamentally strong even as growth has slowed, Bush said at a news conference with Japanese Prime Minister Yasuo Fukuda in Tokyo.

The dollar fell 0.7 percent against the euro on June 16 after G-8 finance ministers stopped short of making a joint comment on currencies, a practice they follow when central bankers are absent from meetings.

German Output

The euro fell earlier against the dollar as the Economy Ministry said today in Berlin that German industrial production dropped 2.4 percent in May, the most in more than nine years. The median forecast of 42 analysts surveyed by Bloomberg News was for a 0.3 percent gain.

Federal Reserve Bank of San Francisco President Janet Yellen said today in San Diego that the central bank ``will not allow a wage-price spiral to develop'' and that U.S. economic growth will ``pick up'' next year.

``There is a rotation in the slowdown story from the U.S. to Europe,'' said Emanuele Ravano, managing director and co-head of European strategy in London at Pacific Investment Management Co., which manages the world's biggest bond fund.

The British pound weakened against the dollar after the Office for National Statistics said U.K. factory output fell 0.5 percent in May. The median forecast of 25 analysts surveyed by Bloomberg News was for no change. Sterling slid as much as 0.9 percent to $1.9649 against the dollar, the lowest since June 24, from $1.9823 at the end of last week.

`Economic Duress'

``We're beginning to see signs of economic duress in Europe and the U.K.,'' said Greg Salvaggio, a vice president of capital markets in Washington at Tempus Consulting, a currency trader. ``We're now likely to see a prolonged slowdown in the euro zone, which should attract capital back to the dollar.''

The 15-nation currency declined 0.6 percent versus the dollar last week after European Central Bank President Jean- Claude Trichet said he had ``no bias'' on borrowing costs following the decision to raise the main refinancing rate to 4.25 percent.

Oil fell today after Iran's Foreign Minister Manouchehr Mottaki expressed confidence in talks with Western governments on the country's nuclear program. Organization of Petroleum Exporting Countries President Chakib Khelil said yesterday record oil prices are more related to the dollar exchange rate than supply. Crude oil for August delivery fell 2.7 percent to $141.44 a barrel on the New York Mercantile Exchange. Oil reached a record $145.85 a barrel on July 3.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.

Last Updated: July 7, 2008 13:43 EDT