Dollar Heads for a Weekly Advance Against the Euro

The dollar headed for the biggest weekly gain in two months against the euro on concern the reluctance of banks to lend is worsening in Europe.

The U.S. currency was near the highest in a week versus the British pound as the cost of borrowing in euros for one month rose by a record amount as banks sought funds to cover their commitments through to the start of next year. A U.S. government report today is forecast to show personal spending increased 0.3 percent last month.

The U.S. dollar is looking relatively cheap and I would be looking to sell the euro and pound, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender. Credit concerns are spreading like a disease from one continent to the next. There are signs of slowing in the European economy.

The U.S. currency, which has fallen 11 percent on a trade- weighted basis this year, was at $1.4771 per euro at 9:25 a.m. in Tokyo from $1.4744 late in New York yesterday. It touched $1.4712 on Nov. 27, the strongest since Nov. 20. The dollar was at $2.0638 per pound from $2.0612 yesterday. It was at 109.79 yen and the euro bought 162.14 yen.

The yield on the March Euribor interest-rate futures contract was unchanged yesterday at 4.4 percent. It has declined 33 basis points since reaching 4.73 percent on July 6. The yield on the 90-day sterling interest-rate futures contract for June fell 8 basis points to 5.33 percent. It was 6.4 percent on July 17. A basis point is 0.01 percentage point.

The London interbank offered rate that banks charge each other for euro loans that only come due after the end of 2007 climbed 64 basis points to 4.81 percent yesterday, the British Bankers' Association said. The rate charged for dollars rose 40 basis points to 5.23 percent.

The dollar will gain to $1.44 per euro and 112 against the yen by the end of June, according to the median forecast of 39 analysts and brokerages surveyed by Bloomberg.

Bernanke

The dollar pared its weekly advance after Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has affected the economy's prospects and policy makers must decide whether the risks between growth and inflation have now shifted.

The outlook has also been importantly affected over the past month by renewed turbulence in financial markets, Bernanke said in a speech in Charlotte, North Carolina late yesterday. The committee will have to judge whether the outlook for the economy or the balance of risks has shifted materially.

He also led a group of analysts in a report forecasting a gradual relaxation of credit concerns in the financial sector over the coming months.

Japan's Inflation

The yen remained higher against the dollar after a Japanese government report showed consumer prices unexpectedly rose for the first time since last December, boosting the central bank's case for interest-rate increases.

Japan's prices are on an uptrend, said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo, a unit of Japan's second-largest brokerage. This raises expectations of the Bank of Japan's next rate increase and should be yen positive.

Japan's currency may rise to 109 per dollar and 160 a euro by year-end, Kameoka forecast.

Housing Slump

The dollar has declined against 15 of the 16 major currencies this year amid the worst housing market slump since 1991 and a credit squeeze that sent three-month interbank borrowing costs to the highest since 2001. Fed policy makers reduced the benchmark rate twice to 4.5 percent to keep the economy out of recession.

The key borrowing rate in the U.K. is 5.75 percent after five increases since 2006, and 4 percent in the euro region after eight increases since 2005.

Futures contracts on the Chicago Board of Trade showed yesterday traders saw a 100 percent chance the Fed will lower its target for overnight loans between banks at least a quarter- percentage point to 4.25 percent on Dec. 11. The chance of a cut to 4 percent is 30 percent.

A separate report today may show the Federal Reserve's preferred gauge of inflation was 1.8 percent in the 12 months through October, according to the median forecast of 29 economists surveyed by Bloomberg News. Fed officials have said they would be comfortable with the reading between 1 percent and 2 percent.

Source - Bloomberg