Currency update – US dollar improving on the good economic news released this week

The dollar rose to a one-month high against the euro as the pace of job erosion in the U.S. slowed while a decline in German retail sales indicated economic weakness is spreading to other developed countries.

The currency increased for a third week against the euro, its longest stretch of gains since May 2007. The Australian and New Zealand dollars fell against all of the other major currencies as reports showed Australia’s manufacturing contracted and business confidence in New Zealand fell.

“The labor market hasn’t changed dramatically, but certainly it’s a relief that things haven’t gotten worse,” said Thomas Benfer, vice president of foreign exchange at BMO Capital Markets in New York. “It looks like the global economy is slowing down. We’re not going to see a surge in the dollar, but it’s moving in the right direction.”

The dollar appreciated 1 percent this week to $1.5564 per euro, from $1.5709 on July 25. It touched $1.5515, the strongest since July 24. The dollar dropped 0.1 percent to 107.71 yen, from 107.84. Japan’s currency gained 1 percent to 167.55 per euro, for the biggest weekly gain since early May. It touched 166.99 yesterday, the highest level since July 17.

The Federal Reserve will keep its target lending rate at 2 percent on Aug. 5, while the European Central Bank will hold its main refinancing rate at 4.25 percent two days later, according to forecasts of economists surveyed. DoitInvest.com has also determined that the policy of standing still will continue further in the US, driven by the incoming elections and the desire to avoid a further slowing down of the economy.

Weaker Pound

The pound fell to $1.9727, the lowest level since July 10, as an index of British manufacturing dropped in July to the weakest since December 1998. The Bank of England is forecast to hold its target rate at 5 percent on Aug. 7.

“Sterling at current levels is a good sell,” said Meg Browne, a senior currency strategist at Brown Brothers Harriman & Co. in New York.

The Aussie dropped 2.6 percent this week after touching 93.02 cents yesterday, the lowest since May 2, as PricewaterhouseCoopers and the Australian Industry Group said the manufacturing index fell to 46.9 in July. The Reserve Bank of Australia will keep its cash target at 7.25 percent on Aug. 6, according to the median forecast of 24 economists.

New Zealand’s currency, known as the kiwi, decreased 2 percent after reaching 72.47, the weakest since Sept. 19. A net 43.2 percent of companies expect the economy will worsen over the next 12 months, up from 38.7 percent in June, ANZ National Bank Ltd. reported this week.

U.S. Payrolls

U.S. payrolls shrank in July for a seventh straight month, decreasing by 51,000, matching the previous month’s decline, the Labor Department said yesterday in Washington. The median forecast of 79 economists surveyed by Bloomberg News was for a reduction of 75,000. The unemployment rate rose to 5.7 percent, the highest since March 2004, from 5.5 percent.

“The market will start to focus on the rise of the unemployment rate, which could cause concerns about the weakness of the economy,” said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. “I’m not ready to call a bottom in the dollar just yet.” The dollar may weaken to $1.58 per euro in the next couple of weeks, said Reid.

The U.S. economy shrank at the end of 2007 and grew less than forecast in this year’s second quarter, figures from the Commerce Department showed July 31.

The 15-nation euro fell yesterday versus the dollar as Germany’s Federal Statistics Office in Wiesbaden said retail sales, adjusted for inflation and seasonal swings, dropped 1.4 percent in June after increasing 0.5 percent in the prior month. The median forecast of 29 economists surveyed by Bloomberg News was for a decrease of 0.5 percent.

Trichet on Rates

ECB President said on July 3 that he had “no bias” or “pre-commitment” after policy makers increased the main refinancing rate a quarter-percentage point.

“We’re seeing the European numbers coming up very soft, so that will put pressure on the ECB not to do anything until the end of the year,” said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina. “I’m thinking a little bit more positively on the dollar.”

The yen rose to a two-week high of 166.99 against the euro yesterday as slowing global growth prompted traders to pare holdings of higher-yielding assets funded in Japan.

Japan’s currency rose to a two-month high of 100.07 per Australian dollar and a four-month high of 77.90 per New Zealand dollar on speculation investors reduced carry trades in which they get funds in countries with low borrowing costs and invest where returns are higher. The target lending rate of 0.5 percent in Japan compares with 8 percent in New Zealand.

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