Dollar Rises to One-Year High Against Euro on Global Outlook

By Ye Xie and Agnes Lovasz

Sept. 11 (Bloomberg) -- The dollar rose to one-year high against the euro on signs global growth is slowing and the yen strengthened on speculation investors will sell higher-yielding assets funded by loans in Japan.

The yen appreciated to the highest level against the euro since August 2006 as concern Lehman Brothers Holdings Inc. will collapse encouraged investors to pare carry trades. New Zealand's currency dropped to two-year lows against the dollar and the yen as the Reserve Bank reduced borrowing costs more than most economists forecast.

``Risk aversion is feeding into the dollar rally right now,'' said Mike Moran, a senior currency strategist at Standard Chartered Plc in New York. ``Investors are increasingly concerned about the backdrop for the rest of the world in the next three, six months.''

The U.S. currency climbed 0.4 percent to $1.3947 per euro at 12:24 p.m. in New York, from $1.3998 yesterday, after touching $1.3882, the strongest level since Sept. 18, 2007. The dollar may gain to $1.30 per euro in six months, Moran said. The yen advanced 1.2 percent to 148.97 per euro, from 150.75, after touching 147.54, the strongest in more than two years. The yen gained 0.9 percent to 106.80 per dollar, from 107.70.

The ICE's Dollar Index touched 80.375 today, the highest level since September 2007, when the Federal Reserve began cutting its target lending rate from 5.25 percent to 2 percent to stave off a recession. The index, a gauge measuring the dollar against the currencies of six U.S. trading partners, reached a low of 70.698 on March 17.

Yen's Gains

The yen gained against all of the other major currencies on speculation investors will reduce trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's currency rose 3.5 percent to 58.14 versus the Brazilian real and 2.7 percent to 12.77 against the South African rand. Japan's target lending rate of 0.5 percent compares with 13.75 percent in Brazil and 12 percent in South Africa.

Lehman plunged 41 percent, extending its slide in the past year to 92 percent, after three analysts downgraded the stock. The Standard & Poor's 500 Index sank 1.5 percent.

``Investors in Japan are in risk-aversion mode, so they're buying the yen,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG.

The New Zealand dollar, known as the kiwi, fell as much as 2.7 percent to 64.38 U.S. cents, the lowest since September 2006, and 3.7 percent to 68.99 yen, the weakest since May 2006. The Reserve Bank cut its official cash rate by a half-percentage point to 7.5 percent, saying the economy is in a recession and inflation will slow.

Yen vs. Euro

The yen gained for a fourth day against the euro after implied volatility on one-month euro options versus the yen rose to 16.94 percent, the highest since March 18.

The Australian dollar dropped to the lowest against the U.S. currency since August 2007 on tumbling prices of raw materials, which account for about 60 percent of the nation's exports. The Aussie fell as much as 1.4 percent to 79.01 U.S. cents and dropped 2.2 percent to 84.44 against the yen.

Platinum for immediate delivery fell as much as 4.2 percent to $1,130.65 an ounce in London, the lowest since Jan. 12, 2007, while gold dropped 1.3 percent to $742.40 an ounce.

The dollar has gained 13 percent since touching the all- time low of $1.6038 per euro set on July 15 as the European economy slowed and crude oil dropped more than 30 percent from its peak of $147.27.

ECB Rate Outlook

The ECB will cut its main refinancing rate by a quarter- percentage point to 4 percent during the first three months of next year, according to Bloomberg surveys of economists.

The European Commission said yesterday the euro region's economy will probably stagnate this quarter after shrinking the previous three months for the first time since the currency's debut in 1999. It cut its 2008 growth forecast to 1.3 percent, from 1.7 percent. By contrast, the median in a Bloomberg News survey of economists was for U.S. growth of 1.7 percent.

Industrial output in the 15 nations that use the euro probably fell 0.2 percent in July after a decline by the same amount in June, according to the median forecast of 31 economists surveyed by Bloomberg News. The report from the European Union's statistics office is due tomorrow.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net
Last Updated: September 11, 2008 12:26 EDT