July 7 (Bloomberg) -- The dollar rose against the euro and the yen on speculation leaders of the Group of Eight nations will signal support for the U.S. currency following a meeting starting today.

The dollar climbed to a one-week high versus the euro after the Bundesbank said German industrial production unexpectedly fell in May and President George W. Bush reiterated support for a ``a strong'' U.S. currency. The yen weakened as stocks advanced, reviving demand for the so-called carry trade. The pound dropped after a report showed U.K. manufacturing contracted more than forecast in May.

``We are seeing some broad-based dollar support,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the largest French bank. ``The trend towards dollar recovery is very much in place. We're likely to see continued official support for the dollar in the form of verbal intervention. It supports the idea that, globally, a stronger dollar is in everyone's interest.''

The dollar rose to $1.5624 per euro, the highest level since June 25, before trading at $1.5661 as of 7:09 a.m. in New York, compared with $1.5706 on July 4. It also strengthened to 107.55 yen, from 106.80. The yen fell to 168.40 against the euro, from 167.73.

The dollar also rose to the highest level in more than a week versus the yen on speculation U.S. officials will say the currency has fallen too far and try to stem gains in oil prices as the G8 summit gets under way. Leaders from Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S. are meeting in Hokkaido, Japan for three days.

`Strong Dollar'

Bush said yesterday, on the first day of his five-day trip to Japan, the U.S. will continue to pursue a strong dollar.

``The U.S. believes in a strong dollar policy,'' Bush said at a news conference with Japanese Prime Minister Yasuo Fukuda in Tokyo yesterday. The U.S. economy remains fundamentally strong even as growth has slowed, he said.

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of the U.S.'s six biggest trading partners, rose 0.4 percent to 73.006, the highest level since June 25.

The dollar will advance to $1.53 per euro in coming months and the dollar index will rise to about 77 by year-end, Stannard forecast.

The U.S. currency also strengthened as crude oil fell after Iran's foreign minister expressed confidence in talks with western governments on the country's nuclear program. Crude oil for August delivery traded at $142.39 a barrel on the New York Mercantile Exchange. Oil reached a record $145.85 on July 3.

German Production

OPEC President Chakib Khelil said yesterday record oil prices are more related to the dollar exchange rate than supply.

Prices have surged mostly because the ``U.S. Federal Reserve lowered interest rates to boost the American economy, which weakened the dollar,'' said Khelil, Algeria's oil minister, who also heads the Organization of Petroleum Exporting Countries.

The euro fell to the lowest level in more than a week against the dollar as German industrial production unexpectedly dropped 2.4 percent in May, its third straight decline, prompting traders to pare bets the European Central Bank will raise interest rates a second time this year.

``We do see the euro weaker,'' said Stuart Bennett, a senior European strategist at Calyon, the investment-banking unit of Credit Agricole SA, France's second-biggest lender. ``We are not relaxed about the growth outlook and it's weaker than the ECB is accepting. Even though we suspect inflation means that they might have to hike again, the growth dynamics for Europe are pointing towards a weaker euro.''

Euro Sentiment `Bad'

The euro will fall to between $1.43 and $1.45 by the end of the year, Bennett predicted.

The 15-nation currency declined last week after ECB President Jean-Claude Trichet said he had ``no bias'' on borrowing costs following the decision to raise the main refinancing rate by a quarter-percentage point to 4.25 percent.

``The sentiment on the euro is bad,'' said Kenichi Nishii, manager of the foreign-exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's biggest publicly traded lender. ``Faced with a worsening economic outlook, the ECB won't be able to raise rates anytime soon. The markets are also wary of any comments on dollar weakness from the Group of Eight summit.''

Pound Declines

The British pound weakened to a one-week low against the dollar after U.K. factory output fell 0.5 percent in May. The median forecast of analysts surveyed by Bloomberg News was for no change.

``That would raise concern over the U.K. economy further and lead to a decline in the pound,'' Tohru Sasaki and Junya Tanase, currency strategists at JPMorgan Chase & Co. in Tokyo, wrote in a research note today before the data were released.

JPMorgan, the third-largest U.S. bank, predicted the Bank of England will keep borrowing costs on hold ``for the time being,'' a change from its previous estimate for higher rates in August.

The pound slid to $1.9683 against the dollar, the lowest since June 25, from $1.9823 on July 4. It may fall to $1.94 by the end of September, Sasaki said, confirming the research note.

The South Korean won snapped two days of losses versus the dollar, rising against all 16 major currencies tracked by Bloomberg, after the government pledged ``stern action'' to stabilize the currency. The won climbed to 1,042.90 per dollar from 1,050.35 last week.

Yen Weakens

The yen weakened for a third day against the dollar as a rally in stocks encouraged the so-called carry trade, in which investors add to holdings of higher-yielding assets funded in low interest-rate currencies such as the Japanese currency.

Stocks rose in Europe and Asia and U.S. index futures advanced as investors speculated shares at their cheapest relative to profit in at least 13 years were attractive. The MSCI Asia-Pacific Index gained 0.4 percent. Europe's Dow Jones Stoxx 600 Index strengthened 0.2 percent and the Standard & Poor's 500 Index of futures climbed 0.5 percent.

The MSCI World Index, which has fallen for five straight weeks, closed last week at its cheapest relative to earnings since at least 1995, based on data compiled by Bloomberg News. The index is valued at 14.3 times earnings.

``Some people are buying foreign currencies and selling yen,'' said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world's largest money manager. ``It's easy to trade off of Japanese equities, because their recovery from a historic losing streak may make people think the carry trade is back on.''

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

Pending Home Sales

Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 8.25 percent in New Zealand and 7.25 percent in Australia.

Gains in the dollar may be limited by speculation industry reports this week will show U.S. home sales declined and consumer confidence fell to a 28-year low.

Pending home resales fell 2.5 percent in May following a 6.3 percent advance the previous month, according to a Bloomberg News survey of economists. The National Association of Realtors will release the data tomorrow at 10 a.m. in Washington.

The University of Michigan will say July 11 that its index of consumer sentiment fell to 55.5 this month, the lowest since May 1980, from 56.4 in June, according to a separate survey.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: July 7, 2008 07:47 EDT