Euro Drops to Six-Week Low as Economy Shrinks; N.Z. Dollar Gains

May 15 (Bloomberg) -- The euro fell to a six-week low against the dollar after reports showed the currency region’s economy contracted more than forecast last quarter and German growth cooled.

The Dollar Index climbed to the highest since July before paring the gain after New York-area manufacturing unexpectedly shrank and U.S. wholesale prices dropped. New Zealand’s dollar rose versus its major peers amid speculation interest rates may be raised. The euro extended its slide against the greenback to a fifth day, the longest stretch since November, as bets increased on further European Central Bank easing.

“Weak growth data from the euro zone is certainly adding to the euro’s downside potential,” Ravi Bharadwaj, a senior market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a telephone interview. “It raises pressure on the ECB to continue to maintain an accommodative stance towards monetary policy.”

The euro depreciated 0.3 percent to $1.2887 at 5 p.m. New York time and touched $1.2843, the weakest since April 4. The shared currency dropped 0.4 percent to 131.76 yen. The dollar declined 0.2 percent to 102.25 yen after gaining earlier to 102.76, the strongest level since October 2008.

Europe’s shared currency closed below the forecast of $1.29 for the third quarter in a Bloomberg survey of economists and strategists.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $53 billion, compared with $44 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $10.7 billion, the largest share of trades at 20 percent. Euro-dollar options were the second most-actively traded at $5.7 billion, or 11 percent, and U.S.-Canada-dollar options were No. 3 at $5.5 billion, or 10 percent.

Dollar-yen options trading was 2.7 percent above the average for the past five Wednesdays at a similar time in the day, according to Bloomberg analysis. U.S.-Canada-dollar options trading was 440 percent above average.

Canada’s dollar rose 0.2 percent to C$1.0157 per U.S. dollar. It depreciated earlier to C$1.0219, a three-week low.

South Africa’s rand slid to its lowest in more than seven weeks after Moody’s Investors Service said the currency is overvalued amid concern that labor unrest is threatening the country’s credit ratings. The rand fell 0.2 percent to 9.2571 per dollar and reached 9.3265, the weakest since March 22.

Kiwi Strengthens

The New Zealand dollar gained against all of its 16 most-traded peers after the International Monetary Fund said yesterday the country’s central bank may need to raise its benchmark interest rate from a record low if rising house prices and household borrowing fan inflation. The kiwi, as the currency is nicknamed, climbed 0.5 percent to 82.41 U.S. cents.

Hungary’s forint strengthened to its highest level in almost three months versus the euro after the country’s economy recorded its first quarterly economic growth in more than a year. The currency gained 1.1 percent to 291.56 per euro and touched 291.12, the strongest level since Feb. 21.

GDP in the euro zone contracted 0.2 percent last quarter, the European Union’s statistics office said. A Bloomberg News survey forecast 0.1 percent shrinkage. The German economy grew 0.1 percent, below the 0.3 percent economists forecast.

“A lot of the euro weakness is coming from the GDP figures that we saw in the euro zone,” Sireen Harajli, a currency strategist in New York at Credit Agricole SA, said in a telephone interview. “The data highlights the problems the euro zone will be facing going forward in terms of growth, and indicates that the ECB is likely to continue its monetary policy. It needs to become more expansive, which is not very positive for the euro.”

ECB Pledge

ECB President Mario Draghi pledged on May 2 to lower rates again if needed following a cut in the benchmark to 0.5 percent.

The yen’s 14-day relative strength index against the dollar was at 29.1, below the 30 level that some traders see as a signal an asset has fallen too far, too fast and may be due to reverse course.

The Japanese currency tumbled 2.5 percent over the past month against nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Indexes. The euro rose 0.2 percent, and the dollar climbed 2.8 percent.

The dollar pared gains today after the Fed Bank of New York’s general economic index fell to negative 1.4 in May from 3.1 in April. Readings less than zero signal contraction. A Bloomberg survey called for an increase to 4.

The U.S. producer-price index slid 0.7 percent last month, Labor Department data showed, the most since February 2010. It fell 0.6 percent in March. U.S. industrial production fell 0.5 percent in April, the most in eight months, the Fed reported.

Dollar Index

The Dollar Index, which Intercontinental Exchange Inc. uses to track the currency against those of six major U.S. trade partners, gained 0.2 percent to 83.787 and reached 84.094, the highest level since July 24.

Sterling rose for the first time in four days against the euro as the Bank of England upgraded its estimate of the U.K. economy in its quarterly inflation report. It forecast the expansion may accelerate to 0.5 percent this quarter, from 0.3 percent in the first three months of the year.

“There’s a sense that some of the worst is over, but the economy is still flatlining,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London.

The pound gained 0.4 percent to 84.58 pence per euro after declining to 85.17 pence yesterday, the weakest since April 25. The U.K. currency appreciated 0.2 percent against the greenback to $1.5234.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net