Dollar Advances to Seven-Month High Against Euro as Oil Slides

By Agnes Lovasz and Stanley White

Sept. 2 (Bloomberg) -- The dollar rose to its highest level in almost seven months against the euro on speculation oil prices at a five-month low will support economic growth in the U.S., the world's largest energy consumer.

The U.S. currency also advanced to its strongest level in more than two years versus the British pound as Hurricane Gustav weakened before making landfall in Louisiana. The Australian dollar fell to the lowest level in almost a year versus the greenback after the country's central bank cut interest rates for the first time since 2001 and said economic growth will slow.

``There is optimism about the U.S. economy,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``Right now it looks like dollar strength is going to continue.''

The U.S. currency rose to $1.4467 per euro, the highest since Feb. 8, before trading at $1.4494 as of 12:02 p.m. in London, from $1.4617 yesterday in New York. The dollar advanced to $1.7783 versus the pound, the strongest since April 2006. It rose to 108.94 yen, from 108.14. The euro was at 157.65 yen from 157.95 yen.

The dollar may appreciate to $1.44 per euro in coming days, where it will meet ``resistance,'' a level that may trigger sell orders, Karpowitz said.

BNP Paribas SA currency strategist Ian Stannard raised his year-end forecasts for the dollar against the euro and the pound.

The Australian dollar fell to 82.70 U.S. cents, the lowest since September last year from 85.04 cents yesterday, after the Reserve Bank of Australia lowered the overnight cash rate target by a quarter-percentage point to 7 percent, a decision forecast by 22 of 23 economists surveyed by Bloomberg News.

Rate Cuts

While the U.S. Dollar Index fell to a record low in March as the Fed cut interest rates at the fastest pace in two decades, traders now anticipate lower borrowing costs will help America recover from a global economic slowdown before Asia or Europe. Investors bought four times as many dollars in August as the average over the previous 12 months, according to Bank of New York Mellon Corp., a custodian for more than $23 trillion in assets.

``The dollar is cheap,'' said Roddy MacPherson, an Edinburgh- based fund manager at Scottish Widows Investment Partnership Ltd., which manages about $165 billion. ``The U.S. has been quite preemptive in bringing rates down and that bodes better for the U.S. relative to many other countries.''

`Increasingly Important'

The ICE futures exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose 0.8 percent to 78.260. It reached 78.274 earlier, the highest since October.

Cheaper oil also boosted the dollar, with crude for October delivery having fallen as much as 8.7 percent since the end of last week to $105.46 a barrel, the lowest since April. The euro- dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

``Oil is becoming an increasingly important factor for the dollar,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``The dollar could rally further should oil break below $110.''

The dollar may rise to $1.45 versus the euro today, he said.

BNP's Stannard in London said the dollar will rise to $1.42 versus the single currency and $1.71 against the pound by year- end. BNP earlier predicted exchange rates at $1.45 per euro and $1.88 against the pound.

`Yen to Rise'

The yen rose to a two-year high of 73.91 versus the New Zealand dollar and to 192.68 against the pound, the strongest level since March 17, as the prospect of lower interest rates in Europe, the U.K. and Australia prompted traders to pare holdings of higher-yielding assets funded with Japan's currency.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The risk is currency moves erase the profits. The Bank of Japan's target lending rate is 0.5 percent, compared with 4.25 percent in Europe and 8 percent in New Zealand.

``The trend is for the yen to rise against the euro, the Australian dollar and other currencies,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank. ``Traders are reevaluating their approach to high-yielding currencies because the monetary policy outlook is changing.''

Japan's currency may rise to 155 versus the euro this month, he said.

Limited Gains

Any gain in the yen may be limited after Japanese Prime Minister Yasuo Fukuda resigned yesterday. Taro Aso, a lawmaker from Fukuda's Liberal Democratic Party, is seen as Fukuda's likely successor.

Fukuda quit after less than a year in office, citing deadlock in the parliament. He's the second premier to step down since the ruling LDP lost control of the less-powerful upper house in July 2007 to the Democratic Party of Japan.

``Over time this may develop into a yen-selling factor,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``There are doubts whether the government can maintain a base to dictate policy and pass legislation, and that's a big uncertainty.''

The pound traded at 81.33 pence per euro, near a record low of 81.64 reached earlier today, on speculation the Bank of England will lower interest rates in coming months as the economy slows.

U.K mortgage approvals dropped to the lowest level in nine years and manufacturing contracted, reports showed yesterday, adding to evidence of a looming recession.

Burden on Sterling

The Bank of England will keep interest rates unchanged at 5 percent on Sept. 4, according to a Bloomberg survey. Traders are paring bets on higher borrowing costs in the U.K. The implied yield on the March short-sterling futures contract fell to 5.06 percent yesterday from 5.50 percent at the start of August. It was at 5.11 percent today.

``The fear is that the economic downturn has gained momentum,'' Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas, France's biggest bank, wrote in a research note yesterday. ``With rate cuts unlikely before the BOE's November meeting, the burden of adjustment is currently falling on sterling.''

The Australian dollar may decline to 80 U.S. cents in the next two months, said Kengo Suzuki, a currency strategist at Shinko Securities Co. in Tokyo.

Australia's currency is poised to fall after dipping below a so-called cloud on its weekly ichimoku chart. Support at 80 U.S. cents is near the 76.4 percent retracement of its advance from its October 2006 low of 74.16 cents to its July high of 98.49 cents, according to a series of numbers known as the Fibonacci sequence.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: September 2, 2008 07:40 EDT