Dollar Weakens Most in 14 Months Versus Euro on Signs of Economic Slowdown

The dollar fell the most against the euro in 14 months and dropped to the lowest level this year versus the yen as economic reports added to evidence that the U.S. recovery is losing momentum.

The greenback touched a level weaker than $1.30 versus the shared currency as minutes of the Federal Reserve meeting last month indicated policy makers trimmed their forecasts for growth. The euro rallied for a third straight week against the dollar before partial results of stress tests on the region’s banking system due on July 23.

“It’s really dollar weakness based on some evidence the economy is slowing,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The economic indicators are pointing strongly toward slower growth in the second half of the year.”

The dollar declined 2.24 percent, the most since May 2009, to $1.2930 per euro yesterday, from $1.2641 on July 9. It touched $1.3008 yesterday, the weakest level since May 10. The U.S. currency dropped 2.3 percent to 86.57 yen, from 88.62 yen, after reaching 86.27 yesterday, the lowest level since Dec. 1. The euro was little changed at 111.96 yen, compared with 112.01.

The euro has rallied 8.9 percent versus the dollar since reaching a four-year low of $1.1877 on June 7 as concern eased that Europe’s sovereign-debt crisis would undermine the region’s economic recovery.

Spain, which has the third-largest deficit in the euro region, drew higher demand in its sale of 3 billion euros ($3.8 billion) of 15-year bonds on July 15. It attracted bids worth 2.57 times the securities offered, compared with 1.79 in an April auction.

Stress Tests

Stress tests of European banks aren’t likely to force major publicly listed lenders to bolster their capital by selling new shares, according to Goldman Sachs Group Inc.

“We do not expect large listed European banks to raise equity as a result of the stress tests,” London-based Goldman Sachs analysts, including Jernej Omahen and Frederik Thomasen, wrote in a report to clients dated yesterday.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain dropped to 27,050 on July 13, compared with record net shorts of 113,890 in May, figures from the Commodity Futures Trading Commission showed yesterday.

Brazil’s real slid 3.8 percent to 48.59 yen and Australia’s dollar declined 3.3 percent to 75.22 yen as a drop in stocks and commodities discouraged demand for higher-yielding assets.

The Standard & Poor’s 500 Index slid 1.2 percent after rallying 5.4 percent last week. Crude oil for August delivery decreased 0.4 percent to $75.71 a barrel.

Fed Minutes

Minutes of the Fed’s June meeting indicated that U.S. central bankers were concerned about lingering high unemployment and risks that inflation could decelerate further. If the outlook worsened, the Federal Open Market Committee would need to consider whether additional stimulus was appropriate, the minutes said.

The Thomson Reuters/University of Michigan preliminary index of U.S. consumer sentiment dropped to 66.5 in July, the lowest since August 2009. The median forecast of 62 economists in a Bloomberg News survey was for a decline to 74. The New York Fed’s general economic index and the Philadelphia Fed’s gauge both fell in July to 5.1, reflecting the slowest pace of manufacturing expansion this year.

Traders cut bets to 13 percent that the U.S. central bank will increase its benchmark rate by its December meeting, down from a 27 percent probability a month earlier, according to CME Group Inc. futures.

‘Poor’ Data

“The poor economic data has helped weaken expectations for any increases in U.S. interest rates,” said Yuichiro Harada, senior vice president of the foreign-exchange division in Tokyo at Mizuho Financial Group Inc., Japan’s second-largest publicly traded bank in terms of assets.

Canada’s dollar dropped against all of its major counterparts on evidence of weakness in the U.S., the nation’s biggest trading partner.

The loonie weakened 2.3 percent to C$1.0582 per U.S. dollar, from C$1.0337 last week. It touched C$1.0584 yesterday, the weakest level since July 7. The currency fell 4.6 percent to 81.81 yen and lost 3.8 percent to C$1.6193 per pound.

Bank of Canada policy makers will increase the target lending rate by a quarter-percentage point to 0.75 percent at their meeting on July 20, according to all 19 economists in a Bloomberg News survey. The central bank became on June 1 the first among the Group of Seven nations to lift borrowing costs when it increased its benchmark from a record low 0.25 percent.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

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