Yen Gains Against Dollar, Euro as Price of Crude Oil Declines

Aug. 11 (Bloomberg) -- The yen strengthened against the dollar as the price of crude oil fell after Saudi Arabia, the world's largest oil exporter, said it has extra capacity that can be put to use ``immediately.''

``The yen's been punished'' as the price of crude oil rose in recent weeks to a record high above $45, said Enrico Caruso, chief currency dealer at currency hedge fund Tempest Asset Management in Newport Beach, California. ``People are fearful of heading into Asia'' betting against the yen, given the Saudi comments, he said.

The yen rose to 110.77 per dollar from 111.32 yesterday at 12:35 p.m. in New York, according to EBS, an electronic currency- dealing system. Against the euro, the yen advanced to 135.33 from 136.22.

The Japanese currency also gained as the International Monetary Fund raised its 2004 forecast for Japan's economic growth by a third to 4.5 percent

Crude oil for September delivery fell 0.4 percent to $44.35 per barrel on the New York Mercantile Exchange. Earlier it dropped as low as $43.30. Saudi Arabia said it holds more than 1.3 million barrels per day of idle oil capacity.

Japan imports virtually all its oil, and the yen has weakened from as strong as about 107 per dollar in late June as crude oil soared from below $36 per barrel.

``The yen's been under pressure quite a bit lately'' from higher oil prices, said Patrick Brodie, chief currency dealer in New York at Sumitomo Mitsui Banking Corp. ``This is a bit of a temporary reprieve; you have to keep your eye on oil'' to see how much it comes off.

Yen gains briefly accelerated as the currency triggered pre- set buy orders below 110.90 per dollar and 135.50 per euro, said Brodie.

Dollar Gains

The dollar gained a third straight day against the euro, to $1.2216 per euro from $1.2237 yesterday, after the Federal Reserve said the economy is poised to quicken, fueling speculation it will follow yesterday's interest-rate increase with another next month.

Demand for the U.S. currency also rose before a government report tomorrow that economists predict will show retail sales rebounded last month from a June drop, bolstering the Fed's view of a strengthening economy.

``They're fully on board with rate hikes; from an interest- rate perspective, you have to buy dollars,'' said John Cholakis, a currency trader in New York at Natexis Banques Populaires.

The Fed yesterday lifted its rate target for overnight loans between banks by a quarter-point to 1.5 percent, and said in a statement it will continue to raise rates at a ``measured'' pace.

Dollar `Base Case'

Some investors had speculated the Fed would drop that wording as a hint it would reduce the pace of rate increases in response to slower hiring during the past four months.

The Fed next meets on Sept. 21. September federal funds futures yielded 1.56 percent, signaling traders see about a 75 percent chance of a quarter-point increase that day. The odds were at 50 percent before yesterday's decision.

``Our base case is they're going to go ahead'' and raise rates next month, said Don Alexander, a currency strategist in New York at Citigroup Private Bank, which manages $202 billion. ``It gives a base for the dollar,'' he said.

The U.S. currency may break below $1.20 per euro should it extend its rally, Alexander said.

A quarter-point Fed boost next month would trim the difference between U.S. and euro region rates to a quarter-point. The European Central Bank's key rate is 2 percent.

Retail sales are expected to gain 1.2 percent after falling 1.1 percent in June, according to the median of 70 forecasts in a Bloomberg News survey. Excluding vehicles, sales probably rose 0.4 percent following a 0.2 percent drop.

``The dollar needs hard facts, not soft words to gain further, and retail sales is the first big test,'' said Carsten Fritsch, a currency strategist in Frankfurt at Commerzbank AG.

Home Loans Articles, Mortgage Loans Articles, Financial News