Dollar Advances on Better-Than-Forecast U.S. Consumer Spending

By Candice Zachariahs and Ye Xie

Dec. 25 (Bloomberg) -- The dollar climbed after U.S. consumer spending and orders for durable goods were higher than economists’ forecasts.

The euro touched a record high versus the pound as an industry report said yesterday U.K. house prices may fall about 10 percent next year. Russia’s ruble slid to its lowest level against the dollar in almost two years after it was devalued for the third time in a week.

“The downside risk for the dollar is limited,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo. “The market has already priced in the deterioration of the economic outlook in the U.S.”

The dollar gained 0.1 percent to 90.50 yen at 11:51 a.m. in Tokyo, after falling 0.6 percent yesterday and declining to a 13-year low of 87.14 yen on Dec. 17. The dollar will trade between 90.20 and 90.80 yen today as liquidity in the currency markets is limited due to the Christmas holiday, said Yamamoto.

The dollar advanced 0.1 percent to $1.3995 per euro after falling 0.6 percent yesterday. The Japanese currency traded at 126.66 yen versus the euro.

The dollar advanced after stocks in the U.S. gained for the first time in three days yesterday following the Commerce Department’s report showing consumer spending in the U.S. fell 0.6 percent in November, a smaller decline than the 0.7 percent drop economists forecast in a Bloomberg survey, as cheaper gasoline left Americans with more cash.

Pound Weakens

The pound traded at 95.07 pence per euro and earlier touched 96.52, the weakest level since the 15-nation currency’s 1999 debut, after a Royal Institution of Chartered Surveyors report on the U.K. housing market strengthened the case for further interest-rate cuts. The pound was little changed at $1.4732.

Russia’s ruble declined for a second day to 28.7147 against the dollar and was little changed at 40.1697 versus the euro after the central bank allowed the currency to slide. Crude oil fell below $36 a barrel, dimming Russia’s economic growth outlook.

Concerns over an extended global recession have helped Japan’s currency gain 23 percent against the euro and 22 percent versus the dollar this year as Japanese investors sold higher- yielding assets and repatriated overseas earnings.

The euro may slide against the yen and dollar in the first quarter of 2009, said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world’s largest money manager for institutions.

“I am relatively bearish on the euro since their fiscal and monetary policies have been behind the curve,” he said, forecasting that the currency may fall to $1.24 and 120 yen by March.

Fed’s Rate Cut

The dollar dropped last week to the lowest level in almost three months versus the euro as the Federal Reserve cut the overnight target rate to a range of zero to 0.25 percent from 1 percent and said it may keep rates low for “some time.”

The Bank of Japan lowered its key lending rate on Dec. 19 to 0.1 and said it would buy commercial paper and more government bonds to pump cash into the economy. The European Central Bank’s benchmark is at 2.5 percent.

The U.S. currency will rebound as investors seek dollar funding and other economies match the Fed’s interest-rate cuts, according to Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut.

“What will turn it around is the ongoing demand for a safe, liquid store of wealth into next year,” Germanier said in an interview on Bloomberg Television. “Demand for a store of wealth and global rate convergence will put the dollar in a relatively good position again.”

U.S. consumer spending rose for the first time in six months after accounting for inflation, the Commerce Department said yesterday in Washington. First-time unemployment benefit claims jumped to 586,000, and durable-goods orders declined less than anticipated, other reports showed.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.netYe Xie in New York at yxie6@bloomberg.net
Last Updated: December 24, 2008 22:14 EST