Euro Falls for 3rd Day Before German Business Confidence Report

By Stanley White

Aug. 26 (Bloomberg) -- The euro fell for a third day against the dollar on speculation a report today will show business confidence in Germany slumped to a three-year low.

The currency also declined for a second day versus the yen on concern credit-market losses and slowing exports will stop the European Central Bank from raising interest rates this year. The yen rose against the Australian and New Zealand dollars as a drop in Asian stocks prompted investors to pare holdings of higher-yielding assets funded in the Japanese currency.

``There's a good chance for the euro to go lower,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``People are giving up on bets for euro gains as the chance of an ECB rate hike fades away.''

The euro fell to $1.4722 at 11:34 a.m. in Tokyo from $1.4754 late yesterday in New York. It reached $1.4631 on Aug. 19, the lowest since Feb. 20. The euro weakened to 161.11 yen from 161.26, near the three-month low of 160.20 yen reached on Aug. 21. The dollar bought 109.43 yen from 109.30.

The pound declined to $1.8480 from $1.8532 yesterday, when it touched a two-year low of $1.8406. Data this week may show U.K. home prices fell by the most in almost two decades.

The yen climbed to 94.10 per Australian dollar from 95.34 late yesterday in Asia. It also advanced 1.8 percent to 76.37 versus the New Zealand dollar.

Investors reduced so-called carry trades after the MSCI Asia Pacific Index lost 1.4 percent on concern widening losses at financial firms will slow global growth. Topeka, Kansas-based Columbian Bank& Trust Co. became the ninth U.S. bank to collapse this year.

Carry Trades

In carry 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 compares with 7.25 percent in Australia and 8 percent in New Zealand. The risk is that exchange rate moves erode those profits.

The Ifo institute's German business confidence index will decline to 97.2 in August, the lowest level since September 2005, from 97.5 the previous month, according to the median forecast of economists surveyed by Bloomberg News.

The euro has lost 8 percent versus the dollar since touching an all-time high of $1.6038 on July 15, sliding as a report showed the European economy shrank in the second quarter and crude oil dropped more than 20 percent from a record $147.27 a barrel set last month.

Rate Bets

Traders reduced bets the ECB will raise its 4.25 percent benchmark rate this year. The implied yield on the Euribor futures contract expiring in December was 5.045 percent, down from 5.065 percent at the start of the month.

`There's good reason why the dollar is rallying, particularly against the euro,'' Kathy Lien, director of research at GFT Forex, said in an interview with Bloomberg Television. ``Once we get more speculation about the possibility of an ECB rate cut, that could push the euro-dollar a little lower.''

Gains in the dollar may be limited by speculation new U.S. home sales declined. Purchases of new houses dropped 0.9 percent to an annual rate of 525,000 in July from 530,000 in June, according to a Bloomberg News survey of economists. New home sales fell to a 17-year low of 513,000 in March. The Commerce Department releases the data at 10 a.m. today in Washington.

No Improvement

``There's not going to be any improvement in the data out of the U.S. and the hope is that it doesn't get any worse than it already is,'' said Mitul Kotecha, global head of currency strategy at Calyon in Hong Kong. ``We could see the dollar being restrained in the short term.''

The pound approached a two-year low against the dollar on speculation the housing market will slow the economy, increasing the likelihood the Bank of England will lower its 5 percent benchmark rate.

U.K. home prices slid by 9.6 percent in August from a year earlier, the most since at least 1991, according to a Bloomberg survey. Nationwide Building Society, Britain's fourth-biggest mortgage lender, will release the data on Aug. 28.

The implied yield on the March short-sterling futures contract fell to 5.265 percent yesterday from 5.5 percent at the start of the month.

``The pound comes under continued selling pressure,'' analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The continued deterioration in the housing market is expected to keep the growth outlook gloomy. Speculation of an early BoE rate cut will continue to develop.''

Investors should sell the pound with a target of $1.82 and an automatic buy order at $1.88 to limit losses, according to the report.

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

Last Updated: August 25, 2008 23:18 EDT