Euro Falls From One-Week High Versus Dollar on Economic Outlook

by Ye Xie and Lukanyo Mnyanda

Jan. 27 (Bloomberg) -- The euro fell from a one-week high against the dollar as a report showing an unexpected gain in German business confidence wasn’t enough to allay concern that the European economy is deteriorating.

The pound rose against the euro for the first time in almost two weeks as concern eased that the bailout of U.K. banks may blow out the government’s fiscal deficit. Canada’s dollar weakened against its U.S. counterpart as commodities dropped and Finance Minister Jim Flaherty prepared to deliver to Parliament his package of fiscal measures for economic revival.

“There has been some stabilization in the data, but it is still at weak levels,” said Marcus Hettinger, a currency strategist at Credit Suisse Group AG in Zurich. “It looks like the recovery in risk appetite is losing steam.” The euro may trade in a range of $1.25 to $1.32 in the next three months, Hettinger said.

The euro was at $1.3222 at 9:26 a.m. in New York, compared with $1.3189 yesterday, after touching $1.3330, the highest level since Jan. 19. The euro was at 117.99 yen, compared with 117.51, after reaching 119.45, also the highest since Jan. 19. The yen increased 0.2 percent to 89.26 per dollar from 89.10.

The pound rose 0.3 percent to 93.98 pence per euro after falling seven straight days, and it increased as much as 1.8 percent to a one-week high of $1.4242. Barclays Plc said yesterday it retained 17 billion pounds ($23.9 billion) more in capital than required by regulators after writing down another 8 billion pounds of bad loans.

U.K. Bank Bailout

Sterling plunged to $1.3503 on Jan. 23, the lowest level since September 1985, after the government announced its second bank bailout in three months. The pound has slumped 29 percent versus the dollar since the end of June.

The Canadian currency declined for the first time in five days, dropping 0.5 percent to C$1.2290 per U.S. dollar, as crude oil for March delivery fell 1.8 percent to $44.89 a barrel. The federal budget will include a stimulus package of more than C$30 billion ($24.5 billion) over two years as the country goes into deficit spending for the first time in more than a decade, the Globe and Mail reported.

The euro earlier gained versus the dollar and yen after the Ifo institute in Munich said its German business climate index, based on a survey of 7,000 executives, rose to 83 in January from 82.7 last month. The median forecast of 37 economists surveyed by Bloomberg News was for a decrease to 81.

IMF Outlook

The International Monetary Fund expects Germany’s economy, Europe’s largest, to contract 2.5 percent this year, fueling expectations the European Central Bank has room for more interest-rate cuts.

“We expect the single currency to remain in a broad downtrend, in particular versus the dollar,” analysts led by Zurich-based Mansoor Mohi-Uddin at UBS AG, the second-largest currency trader last year, wrote in a research report yesterday. “We expect price pressures to keep on abating, and this will likely enable the ECB to ease rates further.”

UBS recommends selling the euro with a target of $1.25 and an automatic buy order at $1.3450 to limit losses, according to the report.

Investors paid the lowest premium since Jan. 12 to buy options granting the right to sell the euro against the dollar, signaling traders are less bearish on the European currency. The one-month 25-delta risk-reversal rate for the euro versus the dollar was as high as minus 0.02, compared with minus 0.32 yesterday. A negative reading indicates investors are willing to pay more to buy puts on the euro versus the dollar, or the right to sell, as opposed to calls, which gives them the right to buy.

Consumer Sentiment

The Conference Board’s consumer confidence index may have climbed to 39 this month after dropping to 38 in December, the lowest reading since 1967, when the New York-based private research group started compiling the data, according to the median forecast of economists surveyed by Bloomberg. The report is due 10 a.m. New York time.

Home prices in 20 U.S. cities declined 18.2 percent in November from a year earlier, the fastest drop on record, as foreclosures climbed and sales sank.

The decrease in the S&P/Case-Shiller index was in line with forecasts and followed an 18.1 percent drop in October. Year- over-year records began in 2001.

Federal Reserve policy makers will maintain the target lending rate in a range of zero to 0.25 percent at a two-day meeting ending tomorrow, according to a separate Bloomberg survey of analysts. The central bank may broaden the range of assets it will purchase to unclog credit markets.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: January 27, 2009 09:34 EST