Euro Rises Versus Dollar, Yen

The euro rose against the dollar after an industry report showed German consumer confidence unexpectedly rose and ECB policy makers suggested interest rates need to stay high to quell inflation., Bloomberg 4/28/2008 6:48:50 AM

The euro snapped a three-day decline and also gained versus the yen and the British pound after ECB President Jean-Claude Trichet said rates at a six-year high will help policy makers achieve price stability. The currency was buoyed as oil climbed to a record $119.93 a barrel. The yen fell against its major counterparts as rising commodity prices spurred demand for high- yielding assets funded by loans from Japan

The European common currency advanced to $1.5666 by 6:59 a.m. in New York, from $1.5630 on April 25. It climbed to a record high against the dollar of $1.6019 on April 22. The euro strengthened to 163.64 yen from 163.15 and to 78.81 British pence from 78.67 pence. The dollar was little changed against the yen at 104.47.

Concern about inflation running at the fastest pace in almost 16 years prompted the ECB to keep borrowing costs at 4 percent since June, while traders are betting the Fed is set to cut rates one more time to bolster an economy weakened by the worst housing slump in a quarter of a century. The Fed has slashed rates by 3 percentage points since September.

Consumer confidence in Germany, Europe's biggest economy, increased to a seven-month high as rising incomes encouraged household spending, a private survey today showed. An index based on a survey of about 2,000 people rose to 5.9 in May from 4.8 in April, GfK AG, Nuremberg-based market-research company, said today. Economists had expected a drop to 4.5, according to a Bloomberg News survey.

Rising oil prices have also increased demand for the common currency. The euro versus the dollar has had a correlation of 0.96 with the price of crude oil in the past 12 months. A reading of 1 would mean they move in lockstep.

Further gains in the euro against the dollar may be limited as the yield between two- and 10-year U.S. notes has narrowed on speculation the Fed may pause in cutting rates while the equivalent German debt curve has widened as traders bet European economic growth will slow.

The difference in yields, or spread, between two- and 10- year U.S. Treasuries narrowed to 149 basis points from 155 basis points in the past week. The difference between equivalent German notes widened to 38 basis points from 32 basis points.

The dollar may extend losses before U.S. data forecast to show the economy grew at the slowest pace in five years. Gross domestic product expanded at a 0.4 percent annual pace in the first quarter, according to a Bloomberg survey before the April 30 Commerce Department report.

Non-farm payrolls, due from the Labor Department on May 2, fell by 78,000 in April and the jobless rate rose to 5.2 percent this month, according to separate Bloomberg surveys.

Euro Rises Versus Dollar, Yen