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Dollar Gains; Report May Show Growth Beat Estimates

Dollar Gains; Report May Show Growth Beat Estimates
By Yumi Kuramitsu and Chris Young

May 26 (Bloomberg) -- The dollar rose against the euro and the yen in Europe on expectations a U.S. government report today will show the economy grew faster in the first quarter than initially estimated.

The U.S. currency gained 7.9 percent against the euro this year as the pace of expansion outstrips that of the euro-zone. Reports yesterday showed U.S. durable goods orders rose by the most since November, while business confidence in Germany fell to the lowest in 21 months. The euro also fell today after the London- based Times reported the leader of France's ruling party as saying it had lost the referendum on the European constitution.

``There is some risk to the downside for the euro on the basis of the data in the U.S. versus Europe,'' said Greg Gibbs, a Sydney-based senior currency strategist at RBC Capital Markets. ``There is an element of strong numbers in the U.S., while there are real concerns over the European economy.''

Against the dollar, the dollar strengthened to $1.2568 against the euro at 6:26 a.m. London, from $1.2601 late yesterday in New York, according to electronic currency-dealing system EBS. The dollar rose as high as $1.2535 on May 23, the most since Oct. 20, and will probably increase to $1.25 within the next week, Gibbs said. The dollar advanced to 107.92 yen from 107.71.

The May 29 vote on the European constitution ``is lost,'' Nicolas Sarkozy, head of the Union for a Popular Movement Party, told French ministers during a meeting, according to the Times. ``It will be a little `no' or a big `no','' he was quoted as telling Prime Minister Jean-Pierre Raffarin, the report said.

`Deteriorating Confidence'

``A `no' vote in the referendum will probably lead to deteriorating confidence in the euro and this report encouraged people to sell the euro,'' said Keizo Tanaka, a trader in Tokyo at Resona Bank Ltd. ``The news came out amid pretty firm sentiment for the dollar, making it easier to buy the dollar against European currencies.''

The yen also declined against the dollar after the China Daily reported central bank Governor Zhou Xiaochuan as saying reform of the yuan exchange rate will be a ``slow business,'' easing speculation about any imminent change in China's currency peg. The report cited comments he made Tuesday, carried by the China Securities Journal.

A stronger yuan would increase the buying power of China, Japan's biggest trading partner, and reduce competitiveness of Chinese exports. The yen has tended to advance when futures traders increased bets that China would let its currency rise, according to data compiled by Bloomberg.

`Pouring Cold Water'

``They are pouring an awful lot of cold water'' on the chance of revaluation, said Alex Sinton, an Auckland-based senior dealer at ANZ Investment Bank. ``This will stop any yen strength.'' The yen may fall to around 108.30 versus the dollar today, he said.

The yen weakened to 136 against the euro from 135.75.

The correlation between the yen and Chinese yuan 12-month non- deliverable forward contracts is 0.80. A figure of 1 would mean they move in lock step. China has valued the yuan at 8.2770 per dollar since 1995 and has come under pressure from the U.S., Japan and Europe to alter the system to allow for a gain.

U.S. gross domestic product probably grew at a 3.6 percent annual rate from January to March, versus a previous estimate of 3.1 percent, according to the median forecast of 73 economists surveyed by Bloomberg News.

Stronger economic growth may support the case for higher U.S. interest rates. The Federal Reserve has raised its overnight target lending rate between banks at each of eight meetings since June.

`Tailwinds'

The Fed's 3 percent rate exceeds the European Central Bank's benchmark by 1 percentage point.

``The prospect of the U.S. and European interest-rate spread widening in favor of the U.S. means the euro's cyclical tailwinds will only get weaker,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. Should the euro fall below $1.25, it will head toward $1.1770, he said.

Some investors holding short positions in the euro, betting on a decline, have placed pre-set orders to buy at about $1.2620 to limit losses in case their bets turn out to be wrong, said ANZ Investment Bank's Sinton.

Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

A gain in the euro past $1.2620 will propel the currency to $1.2650, Sinton said.

`Built Into Market'

``There's a fair amount already built into the market on the GDP revision, and we're seeing some selling'' of the U.S. currency, Sinton said.

U.S. durable-goods orders rose 1.9 percent last month, more than the 1.3 percent forecast in a Bloomberg survey of economists. The German Ifo institute's index of business sentiment unexpectedly fell to 92.9 in May from 93.3 in April. The Rome- based Isae institute's Italian confidence index fell to the lowest since November 2001, another report also showed.

``We can't get too negative on the U.S. dollar,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney, Australia's biggest investment bank. ``The uptrend has decelerated, but it was never going to be an easy process, and we cannot ignore the realities of relative interest rates, relative growth.''

To contact the reporter on this story:
Chris Young in Sydney at [e-mail].


LINK: http://quote.bloomberg.com/apps/news?pid=10000103&sid=aonA_UbO46QE&refer=news_index