Euro Falls as Politicians Express Concern Over Currency's Gain


The euro fell for a second day against the dollar and halted five days of gains versus the yen as European politicians expressed mounting apprehension over the pace of the advance.

The currency shared by 13 countries weakened after Spain's Deputy Finance Minister David Vegara said the gain poses a burden for exporters and French Finance Minister Christine Lagarde said Europe needs a plan to curb the increase.

``The rapidly rising euro is not in their best interests at this point,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodian bank, with more than $20 trillion in assets under administration.

The euro fell 0.5 percent to $1.4162 at 11:44 a.m. in New York for the biggest two-day decrease since mid-August. Yesterday it touched $1.4283, the strongest since the euro's 1999 inception. It was the eighth day the euro reached a record. The euro decreased 0.4 percent to 164.07 yen.

Europe's currency has seen a ``significant increase, which complicates the work of exporters,'' Vegara said in a briefing for journalists.

Lagarde told Les Echos that European countries need a common plan to reverse the euro's advance against the dollar, yen and Chinese yuan. She was also quoted by the French daily newspaper as saying she would like U.S. Treasury Secretary Henry Paulson to say ``loud and clear'' that a strong dollar is good for the U.S. economy.

Producer Prices

The European currency extended losses after a report showed European producer price inflation eased in August to the slowest in more than three years, taking some pressure off the European Central Bank to increase interest rates. Factory gate prices in the countries that use the euro rose 1.7 percent from a year earlier, the lowest reading since April 2004.

European concern over the euro's strength is rising before meetings starting Oct. 19 in Washington of policy makers from the ECB, the 27-member European Union and the Group of Seven nations including the U.S.

``European officials are worried that the euro's rise to all-time highs every day is too fast,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co. ``Long positions may be unwound.'' A long position is a bet a currency will rise.

The 14-day relative strength index, which traders use to predict price movements, fell to 67 for the euro against the dollar from 76 yesterday. A level above 70 indicates the euro's rally may reverse.

Euro Net Longs

A report from the Washington-based Commodity Futures Trading Commission showed last week the difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 83,448 on Sep. 25, compared with net longs of 86,049 a week earlier.

The yen rose against the euro on speculation Japanese exporters took advantage of its weakness to buy the currency and Japanese investors repatriated some European bond earnings.

Japan's currency rose 1 percent against the Australian dollar and 0.7 percent versus the New Zealand dollar.

The currencies of Australia, New Zealand and Europe have been beneficiaries of so-called carry trades in which traders borrow in a country with lower interest rates and invest where yields are higher. The benchmark interest rate is 6.50 percent in Australia, 8.25 percent in New Zealand and 4 percent in the euro region. Japan's rate of 0.5 percent is the lowest among major economies.

Australian Rates

The Reserve Bank of Australia will leave rates unchanged when it announces a policy decision tomorrow, and the Bank of England and the ECB will do likewise on Oct. 4, according to separate Bloomberg News surveys of economists.

The dollar was little changed at 115.84 yen.

The number of Americans signing contracts to buy previously owned homes fell more than forecast in August, another sign the housing recession will persist.

The National Association of Realtors' index of signed purchase agreements dropped 6.5 perce...


Bloomberg
10/2/2007 9:44:26 AM