Dollar May Gain; Gauge of U.S. Services May Have Risen in July

Aug. 3 (Bloomberg) -- The dollar may gain against the euro in Asia on speculation a report tomorrow will show a measure of the U.S. service industry rose in July, another sign the economy is expanding after a second-quarter slowdown.

The Institute for Supply Management's service index is forecast to have risen for the first time in three months. The institute said yesterday its factory index rose to near a 20-year high, helping the dollar pare losses made after the U.S. government said al-Qaeda may attack financial institutions including the New York Stock Exchange.

Investors are ``now back to focusing on strong U.S. economic fundamentals,'' said Greg Salvaggio, vice president of currency trading at Tempus Consulting in Washington. ``We're fundamentally bullish on the dollar for the remainder of this year.''

Against the euro, the dollar traded at $1.2019 at 10:39 a.m. in Tokyo from $1.2026 late yesterday in New York, according to EBS, an electronic currency dealing system. The dollar yesterday recouped losses after weakening to $1.2093. It may rise to $1.12 by September, Salvaggio said. The U.S. currency was also at 110.61 yen from 110.72.

``The market wants to embrace the U.S. dollar, but is being pulled back somewhat by terrorism concerns,'' said Robert Rennie, currency strategist in Sydney at Westpac Banking Corp. The dollar may trade between $1.1950 and $1.2050 against the euro today, he said.

ISM

The ISM's index of financial services, construction, retail and other non-manufacturing industries probably rose to 61.5 from 59.9 in June, the lowest since December, according to the median of 61 forecasts in a Bloomberg News survey.

The institute said yesterday its factory index rose to 62 in July from 61.1 in June. Readings above 50 signal expansion. The gauge has exceeded 60 for nine months, the longest stretch since July 1972 through June 1973.

Demand for the yen may increase on speculation sales to the U.S. will rise as the world's biggest economy expands, spurring Japan's export-led growth.

Japan's Cabinet Office plans to maintain its forecast that the economy is recovering at a solid pace, in line with its assessment last month, Nikkei English News said, without citing the source of the information. The report is scheduled to be released Thursday. In July, the government raised its overall assessment for the economy for the first time in six months.

`Bullish'

``I am bullish on yen,'' said Akira Takei, who helps manage the equivalent of $9.2 billion in Tokyo at Fuji Investment Management Co., a unit of Japan's biggest bank by assets. ``Japan's economy is experiencing a solid recovery. That makes it easier to buy the yen,'' which may strengthen beyond 105 per dollar within three months.

The world's No. 2 economy extended its longest expansion since 1997 in the second quarter, a report next week will probably show. Japan's gross domestic product grew 4.1 percent in the three months ended June 30, according to the median of 12 forecasts compiled by Bloomberg News, the ninth quarter of growth.

Toyota Motor Corp., the world's second-largest carmaker may today report a 13 percent gain in first-quarter profit after it led Asian vehicle manufacturers in taking record shares of U.S. automotive sales.

Job Creation

The U.S. economy grew at a 3 percent annual pace in the second quarter, slower than the 4.5 percent in the previous three months, a report Friday showed. Federal Reserve Chairman Alan Greenspan last month said a ``soft patch'' in June should ``prove short-lived.''

Greenspan's comment has been supported by other reports last week that showed improving conditions in July. The dollar advanced Friday after the National Association of Purchasing Management-Chicago reported its index of business expansion surged to 64.7 for July, from 56.4 in June. Also, the University of Michigan's index of consumer confidence rose to 96.7, the highest since January, from 95.6 in June.

The Labor Department is expected to report Friday almost a quarter of a million jobs were created in July, more than double the June figure, according to the median of 70 forecasts in a Bloomberg News survey.

`Solid Performance'

The July reports are adding to speculation the Fed will raise interest rates for a second time this year by a quarter percentage point to 1.5 percent at its next meeting on Aug. 10.

``The trend for the solid performance of the dollar should remain in place on the outlook of higher U.S. rates,'' said Kikuko Takeda, manager of the foreign exchange and treasury division in Tokyo at Bank of Tokyo-Mitsubishi Ltd., a unit of Japan's second-biggest lender. ``Based on that, any good data which meets expectations will support the dollar this week.'' The dollar may rise to 112 yen this week, she said.

In other trading, the British pound bought $1.8258 from $1.8271. The Swiss franc was at 1.2805 from 1.2792.

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