Dollar Falls to Two-Week Low as Manufacturing Index Declines

Dollar Falls to Two-Week Low as Manufacturing Index Declines

By Ye Xie and Bo Nielsen

Feb. 21 (Bloomberg) -- The dollar fell to a two-week low against the euro after a report showed manufacturing in the Philadelphia region contracted this month, bolstering speculation the U.S. is headed for a recession.

The U.S. currency posted its biggest decline this month versus the yen as the report sustained bets the Federal Reserve will cut interest rates by a half percentage point in March. The British pound rose the most in a month after a report showed U.K. retail sales climbed more than double the pace forecast.

The Philadelphia report is ``a reminder of U.S. weakness, so the dollar softens,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million funds under management. ``As far as sentiment goes, it's definitely at recession levels.''

The dollar weakened to $1.4814 per euro at 4:10 p.m. in New York, from $1.4715 yesterday, and touched the weakest since Feb. 4. The dollar fell 0.8 percent to 107.29 yen, from 108.12, the steepest decline since Jan. 30. The yen advanced to 158.92 per euro from 159.09, after earlier reaching a five-week low.

The yen gained against 13 of the 16 major currencies on concern that the global economy will slow with the U.S., prompting traders to shun higher-yielding assets funded by cheap loans in Japan. The yen rose 0.9 percent against the Mexican peso and 0.8 percent against the Australian dollar. Japan's benchmark rate of 0.5 percent, the lowest among developed nations, compares with 7.5 percent in Mexico and 7 percent in Australia

Pound, Real

The pound rose 1.1 percent to $1.9621, the biggest advance since Jan. 24, after the Office for National Statistics said sales at U.K. stores increased 0.8 percent from December, when they declined 0.2 percent.

Brazil's real rose to the highest level in more than eight years as demand for commodities and local securities fueled purchases of the currency. The real touched 1.7009, the strongest level since May 1999. Gold, platinum and soybeans rose to records today.

The Philadelphia Federal Reserve Bank's general economic index fell to minus 24, the lowest since 2001, from minus 20.9 the prior month, the bank said. Negative readings signal contraction. The median forecast in a Bloomberg survey was for an improvement to minus 10.

`Euro Bulls'

The dollar has lost 5.5 percent against the euro since Sept. 18, when the Fed began lowering its benchmark rate from 5.25 percent.

Today's report ``validated the Fed's move, and the Fed will be more accommodative,'' said Carl Forcheski, a vice president on the corporate currency sales desk at Societe Generale SA in New York. ``It gave euro bulls a reason to push it higher.''

Futures on the Chicago Board of Trade show a 92 percent chance the central bank will lower its target by 0.5 percentage point to 2.5 percent at its next scheduled meeting on March 18. The remaining bets are for a 0.25 percentage point reduction.

Fed officials cut their 2008 growth forecasts and said rates should be held down ``for a time,'' minutes of their Jan. 29-30 meeting showed yesterday.

The euro also advanced as the European Commission raised its inflation forecast and French consumer prices quickened.

European Inflation

Inflation in the euro region will average 2.6 percent this year, the strongest since the common currency's inception in 1999 and up from the previous estimate of 2.1 percent, the EC said. French consumer prices climbed an annual 3.2 percent in January, from 2.8 percent in December, based on E.U.-harmonized methods, Insee, the national statistics bureau, said. That's the fastest since 1996, when Insee began reporting the data.

The implied rate on the June Euribor interest-rate futures contract rose to 4.085 percent, from 4.03 percent yesterday, signaling traders are reducing wagers the European Central Bank will cut its benchmark from 4 percent. The yield averaged 0.18 percentage point more than the ECB'sThe market is paring back expectations of ECB rate cuts,'' said David Powell, a currency strategist with research company IDEAglobal in New York. ``The same forces are operating in the euro zone as in the U.S. -- lower growth and higher inflation. The difference is that the Fed is willing to look away from inflation and cut rates while the ECB is not.''

At 3.34 percent, the two-year German bund yielded 1.37 percentage points, or 137 basis points, more than similar- maturity Treasuries, from 111 basis points yesterday. The yield difference reached 139 basis points on Jan. 22, the most since 2002, as the Fed cut rates by 2.25 percentage points since September.

The euro will return within the next week to the record high of $1.4967 that it reached in November, and a break of that level may point to a rally to $1.55, said Tom Fitzpatrick, chief technical strategist at Citigroup Inc. in New York.

benchmark from 1999 until August.