Dollar news

Dollar Rises on U.S. Productivity, Signs of European Slowdown

May 7 (Bloomberg) -- The dollar rose against the euro and the yen as U.S. productivity unexpectedly accelerated in March while Europe showed signs of an economic slowdown.

The currency appreciated for the first time in three days versus the euro as the yield advantage of German bunds over Treasuries decreased to the narrowest in more than two months. The pound fell to a 2 1/2-month low against the dollar after an industry report showed U.K. consumer confidence declined last month to the weakest in at least four years.

``Market sentiment is shifting to a more positive outlook for the dollar,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``In the near term, there's a real reason the dollar should strengthen on the back of weaker European data.''

The dollar increased 1 percent to $1.5378 against the euro at 10:30 a.m. in New York, from $1.5532 yesterday. The U.S. currency rose 0.6 percent to 105.43 yen, from 104.77. The euro fell 0.4 percent to 162.15 yen, from 162.71.

The U.S. currency strengthened as the Labor Department reported that worker productivity unexpectedly accelerated in the first quarter, indicating the world's largest economy can expand with lower inflation.

Hoenig on Inflation

The dollar started its gain as Federal Reserve Bank of Kansas City President Thomas Hoenig said in a speech in Denver yesterday that ``serious'' U.S. inflation pressure may compel the central bank to increase interest rates.

``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' said Hoenig, a nonvoting Fed official this year.

The British pound dropped 0.8 percent versus the Canadian dollar and 0.7 percent against the Swedish krona after Nationwide Building Society said an index of sentiment in the U.K. declined to the lowest level since the survey began in May 2004. The pound fell as much as 1.1 percent to $1.9518, the weakest since Feb. 21. It decreased 0.2 percent to 78.87 pence against the euro.

The U.S. currency has rebounded 3.7 percent versus the euro since April 22, when it sank to a record low of $1.6019. The Fed said rate reductions to date were ``substantial'' after lowering its target lending rate last week by a quarter-percentage point to 2 percent, its seventh cut since September.

Dollar Outlook

The dollar will rise to $1.47 against the euro in three months because the Fed may not lower interest rates any further, according to UBS AG, the world's second biggest currency trader.

``Macro developments are supportive for the dollar continuing to strengthen,'' wrote Geoffrey Yu, Zurich-based strategist at UBS, in a research note today. ``Fed members stepped up hawkish commentary.''

The spread between two-year German notes and similar- maturity U.S. Treasuries reached 1.36 percentage points today, the narrowest since late February, making dollar-denominated assets more attractive to investors. The European Central Bank will leave its main refinancing rate at a six-year high of 4 percent tomorrow, according to all 53 economists surveyed by Bloomberg News.

Retail sales in the euro area declined 1.6 percent in March from a year earlier, the biggest drop since the data began in 1995, the European Union's statistics office said today. Sales fell 0.4 percent from the prior month.

German Manufacturing

The euro extended its drop versus the dollar after a government report showed German manufacturing orders dropped 5 percent in the year ended in March, compared with an 8.9 percent increase the prior month.

``The ECB has already shifted from a pretty hawkish stance to something close to neutral,'' said Meg Browne, a senior currency strategist at Brown Brothers Harriman & Co. in New York. ``We expect the European data to continue to deteriorate and the ECB to shift to a more dovish stance.''

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, rose to 73.531, from 72.999 yesterday.

``We're dollar bulls,'' said Michael Metcalfe, the head of macro strategy in London at State Street Global Markets, a unit of the world's largest money manager for institutions. ``We've seen the top in euro-dollar.''