Euro Falls Versus Dollar as German Business Confidence Slumps
By Lukanyo Mnyanda and Stanley White
April 24 (Bloomberg) -- The euro dropped against the dollar and yen as an industry report showed German business confidence fell to the lowest in more than two years in April, indicating the U.S. economic slowdown is spreading to Europe.
The 15-nation currency declined by the most in almost a week against the U.S. dollar as the difference in yields between German two-year notes and similar-maturity Treasuries narrowed to the least in a month. The dollar rose against the yen on speculation the Federal Reserve will pause cutting rates after next week. The New Zealand dollar slid after the central bank signaled it may lower borrowing costs later this year.
The data ``marked something of a watershed in terms of euro- dollar,'' said Adam Cole, head of global currency strategy in London at Royal Bank of Canada, the nation's biggest lender. ``It makes euro gains much harder to come by'' and the currency may decline to $1.40 by the end of the year, he said. That compares with an average forecast of $1.48 in a Bloomberg survey.
The euro fell 0.9 percent to $1.5750 per dollar at 7:13 a.m. in New York, from $1.5889 yesterday. It traded at $1.6019 on April 22, the highest level since its 1999 debut. The euro dropped to 163.04 yen, from 164.28 yen. The dollar was little changed at 103.50 yen.
The New Zealand dollar weakened to 79.26 U.S. cents, from 79.86 cents yesterday in New York and to 82.03 yen from 82.56 yen. The Reserve Bank of New Zealand left its benchmark rate at a record high of 8.25 percent. Governor Alan Bollard said borrowing costs will be unchanged ``for a time yet,'' compared with last month's prediction of a ``significant time.''
Commodities Drop
The Australian dollar declined to 94.57 U.S. cents, from 94.92 cents yesterday, when it reached a 24-year high of 95.41 cents, as prices of the commodities the nation exports declined. The Aussie, as the country's currency is known, was at 97.89 yen from 98.11.
The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, fell to 102.4, from 104.8 in March. Economists surveyed by Bloomberg News had forecast a drop to 104.3.
An index of sentiment among 4,000 French manufacturers slid to 106 in April from a revised 108 in March, Insee, the Paris- based national statistics office, said today. Economists expected 108, according to a Bloomberg survey.
European two-year government notes gained after the data, pushing the yield spread with equivalent Treasuries 10 basis points lower to 157 basis points, the least since March 24.
``The euro-area economy cannot remain insulated from the slowdown in the U.S. for too long, and support for the euro should wane,'' said Carsten Fritsch, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-largest bank. ``Talk about possible interest-rate increases is not appropriate; there's a higher risk of cuts.''
Oil Prices
The euro also weakened after the price of a barrel of crude oil fell. Crude for June delivery dropped as much as 1 percent to $117.12 in after-hours electronic trading on the New York Mercantile Exchange, and was at $117.39 today. It rose to a record $119.90 on April 22.
European policy makers have been wary inflation will quicken after the cost of crude surged 82 percent in the year. The euro versus the dollar has had a correlation of 0.96 with oil over the past 12 months, according to data compiled by Bloomberg. A reading of 1 would mean they move in lockstep.
The implied yield on the three-month Euribor futures contract for December fell 4 basis points to 4.56 percent as traders reduced bets on the likelihood of an ECB rate increase. The contracts settle to the three-month inter-bank offered rate for the euro, which averaged 18 basis points more than the ECB's benchmark rate from 1999 until August.
ECB Comments
None of the ECB's policy makers think price pressures are strong enough to justify raising borrowing costs, said Michael Bonello, a council member and governor of the Maltese central bank. ``No one thinks interest rates should be higher than 4 percent,'' he said today in Malta. ``It's very difficult to make the argument for higher interest rates.''
The euro's decline below the so-called support level around $1.58, which represents the 21-day moving average, may spark more selling, according to Nicole Elliot, a senior technical analyst at Mizuho Corporate Bank.
``The $1.58 level was key and now we've broken that,'' Elliot said from London. ``I think we've seen the high for the week and now it's a question of how far we drop.''
The dollar advanced on speculation the Fed is almost finished cutting its benchmark rate after 3 percentage points of reductions since September, to 2.25 percent.
Fed `Pause'
Futures on the Chicago Board of Trade show an 86 percent chance the U.S. central bank will cut its benchmark by a quarter- point on April 30. The balance of bets is for no reduction.
The Dollar Index traded on ICE futures in New York, which tracks the U.S. currency against those of six trading partners, rose as much as 0.8 percent to 72.25, the highest since April 18, and was at 72.29, from 71.819 yesterday. It dropped to a record of 70.698 on March 17.
Dollar gains may be limited on speculation Commerce Department reports will show sales of new homes slid to a 13-year low in March and growth in durable goods orders stalled.
Purchases of new homes fell 1.7 percent from the prior month to an annual rate of 580,000, according to a survey of economists by Bloomberg News. The report is due at 10 a.m. in Washington. Orders for products meant to last at least three years rose 0.1 percent in March, according to a separate survey. The data will be released at 8:30 a.m.
``Today's reports may pose downside risks for the dollar,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo, a unit of Japan's second- largest brokerage. ``A weaker-than-expected report on durable goods may raise expectations of the Fed's further rate cuts.''
The dollar may fall to 97 yen by the end of June, Kameoka said.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
Last Updated: April 24, 2008 07:20 EDT
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