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Dollar Falls for a Second Day on Slowing U.S. Economic Growth

Dollar Falls for a Second Day on Slowing U.S. Economic Growth
By Anchalee Worrachate and Kosuke Goto

May 7 (Bloomberg) -- The dollar fell for a second day against the euro before reports this week that will probably show a dip in sales at U.S. wholesalers and retailers, adding to signs the world's largest economy is slowing.

The Federal Reserve may show greater concern about a U.S. downturn at a policy meeting this week, reinforcing the case for an interest-rate cut this year. The U.S. currency was also weaker against the euro as traders bet on higher European borrowing costs in June and after Nicolas Sarkozy, who favors lowering taxes to spur growth, won the French presidential election.

``It's hard to push the dollar higher,'' said Carsten Fritsch, currency strategist at Commerzbank AG in Frankfurt. ``The U.S. economy is losing its momentum and that fuels speculation the Fed may be able to cut rates this year. At the same time, ECB rates are on the way up.''

The dollar dropped to $1.3609 at 07:27 a.m. in New York from $1.3592 on Friday and $1.3549 on May 3. The dollar fell to a record low of $1.3681 against the euro on April 27. The U.S. currency was also lower against the yen, trading at 119.96 yen from 120.18 yen on Friday.

European trading was subdued because of a public holiday in the U.K. today.

Interest-rate futures showed May 4 that traders see a 17 percent chance the Fed will cut its benchmark 5.25 percent rate by August. The European Central Bank's rate is 3.75 percent and the Bank of Japan's is 0.5 percent, the lowest among major economies.

Dollar Decline

The dollar fell May 4 to an all-time low of 79.21 against the currencies of seven major trading partners, according to a Fed index published on its Web site. The euro area has the heaviest weight in the index, followed by Canada, Japan, the U.K., Switzerland, Australia and Sweden.

The Fed's U.S. Trade Weighted Real Broad Dollar index, a monthly inflation-adjusted gauge, has fallen 16 percent since 2002 to 94.27, near the lowest in 10 years.

The euro headed for the first two-day gain against the U.S. currency in almost three weeks as signs of a quickening European economic growth and inflation bolstered the case for higher rates.

ECB council member Yves Mersch said May 6 the temporary slowdown in inflation predicted by the central bank appears to be over already. The comment suggested the bank sees an increased risk of prices rising more rapidly.

The bank sees ``strong upside inflation risks in the medium term'' and ``must therefore make sure we achieve price stability not only from month to month, but also in the medium term,'' he said in an interview.

European Forecasts

The European Commission today raised its forecasts for euro- region economic growth this year to 2.6 percent from 2.4 percent predicted in February. German manufacturing orders unexpectedly gained 2.4 percent from February, when they gained 4.3 percent, the Economy and Technology Ministry said today. .

Europe's single currency may reverse last week's biggest loss in two months on speculation the Frankfurt-based ECB will signal at its May 10 meeting it will lift rates in June for an eighth time since late 2005.

Analysts expect ECB President Jean-Claude Trichet to use the word ``vigilance'' to indicate rates will go up. JPMorgan Chase Bank said in the 7 times that he has used the term in this tightening cycle, the euro has risen against the dollar on the day on five of them.

The yield advantage Treasuries have enjoyed over European debt is narrowing. The benchmarch 10-year U.S. Treasury note yields 4.64 percent, about 44 basis points more than the benchmark bund, close to the smallest gap since November 2004.

Sarkozy Wins

``I'm still long the euro on the relative interest rate story,'' said Tobias Davis, senior currency dealer at Custom House Global Foreign Exchange in Sydney. A long position is a bet the currency will rise. ``The election of Sarkozy could be a sign of stability, so the markets won't be spooked by him.'' A long position is a bet the currency will rise.

Sarkozy, candidate for the governing Union for a Popular Movement, took 53.2 percent of the vote with 96 percent counted in the French election.

``Sarkozy's election is seen as bullish for the euro,'' Sue Trinh, currency strategist at RBC Capital Markets. ``Sarkozy is pro-reform and that should help the potential growth of France in a long term.'' Trinh sees the euro reaching an all time high of $1.38 by the end of the year.

Provided his party wins June parliamentary elections, lawmakers will be asked to vote on a budget that scraps payroll charges and income taxes on overtime hours. It would also eliminate inheritance taxes for all but the richest 5 or 10 percent and introduce a deduction for mortgage payments.

BOJ Minutes

The yen rose after the minutes from a Bank of Japan meeting on March 19-20 pointed to higher borrowing costs this year.

The central bank should gradually raise interest rates as the economy extends its longest postwar expansion, minutes of the bank's March board meeting showed today.

Governor Toshihiko Fukui last month said the central bank will be able to raise rates as long as it's confident about the outlook for growth and prices. The central bank predicted last month the economy will expand 2.1 percent this fiscal year ending March 31 and next fiscal year.

The BOJ may raise interest rates as early as June, said Nobuo Ibaraki, deputy general manager of foreign exchange in Tokyo at Nomura Trust & Banking Co.

``The BOJ is very keen to normalize its rate policy as long as the economy is holding fine,'' said Ibaraki. ``With the market dropping its guard on it, this may push up the yen rapidly.''

To contact the reporter on this story: Anchalee Worrachate in London at [e-mail] ; Kosuke Goto in Tokyo at at [e-mail]
Last Updated: May 7, 2007 07:32 EDT


LINK: http://www.bloomberg.com/apps/news?pid=20601102&sid=aYt24rlqGbRc&refer=uk