Dollar Posts Biggest Weekly Decline Against Euro Since 2006

By Bo Nielsen

March 28 (Bloomberg) -- The dollar posted the biggest weekly drop against the euro in more than two years as traders increased bets the Federal Reserve will cut borrowing costs further while the European Central Bank holds rates steady.

The currency fell against most of its major counterparts this week as reports showed U.S. manufacturing and housing weakened while German and French business confidence rose. The pound declined to a record versus the euro as March consumer confidence slumped to a 15-year low.

``Most other central banks focus on inflation pressures building in their economies, while the Fed, although concerned about inflation, clearly is more concerned about the downside risk to the economy,'' said Robert Sinche, head of global currency strategy in New York at Bank of America Corp., in an interview with Bloomberg Radio. ``That leaves the Fed out of step and the dollar out of sorts.''

The dollar traded at $1.5798 per euro at 4:32 p.m. in New York, compared with $1.5779 yesterday. It traded at 99.25 yen, compared with 99.65 yesterday. Japan's currency traded at 156.80 per euro, compared with 157.21.

The U.S. currency dropped 2.4 percent against the euro this week, the biggest decline since January 2006. The dollar traded within 2 cents of $1.5903 per euro, the all-time low reached on March 17.

The Icelandic krona was the biggest loser against the dollar today among the 177 currencies monitored by Bloomberg News on concern financial firms will suffer from the global credit freeze. The risk of Iceland's biggest banks defaulting rose above 49 percent, credit-default swaps show.

Turkish Lira

The Turkish lira dropped to the lowest level in almost seven months against the dollar before a March 31 hearing on a suit brought by the chief prosecutor to shut down the ruling party for undermining secularism. The lira fell as much as 2.4 percent to 1.3059 per dollar, its lowest level since Sept. 10.

The pound dropped against most of the major currencies on the decline in consumer confidence and a separate report showing U.K. housing prices advanced in March at the slowest pace in more than a decade. Sterling fell as much as 0.8 percent to a record of 79.29 pence against the euro.

European Central Bank council member Axel Weber indicated policy makers would raise borrowing costs if inflation accelerated. While the current ECB benchmark rate of 4 percent is helping to contain inflation, the bank ``will act'' if its price-stability goal is threatened, Weber said in a speech in Luxembourg today.

German Confidence

German business confidence rose in March as companies increased efficiency and reduced labor costs, helping them remain competitive even after the euro gained 17 percent against the dollar in the past year. French business confidence got a boost from consumer spending and export orders.

Orders for U.S. durable goods unexpectedly fell in February, led by a slump in demand for machinery. Sales of new homes dropped last month to a 13-year low.

``Numbers from the U.S. show the economy is worse than most people expected, while numbers from Europe have been better than expected,'' said Tom Fitzpatrick, global head of currency strategy in New York at Citigroup Global Markets Inc., the world's third-biggest currency trader. ``Overlay the comments from the ECB on inflation and you have a weak dollar.''

The euro's nine-day stochastic oscillator, a measure of deviations from a trend, was 81.2, according to data compiled by Bloomberg. A level above 80 suggests a currency has risen too fast to be sustained.

ECB Rates

Europe's currency has gained 8.4 percent versus the dollar this quarter as traders reduced bets the ECB will lower rates this year. The yield on the Euribor interest-rate futures contract expiring in December increased to 4.04 percent, compared with 3.91 percent a week earlier.

Futures on the Chicago Board of Trade show traders increased bets the Fed will lower its 2.25 percent target lending rate by a half-percentage point on April 30. The futures showed a 46 percent chance of a cut to 1.75 percent, compared with 42 percent odds yesterday. The remaining bets were for a reduction of a quarter-percentage point.

The Dollar Index traded on ICE Futures in New York, which tracks the currency against those of six trading partners, was at 71.77, down from 72.71 a week ago. It reached a record low of 70.698 on March 17.

To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: March 28, 2008 16:34 EDT

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