Dollar Falls as New York Manufacturing Shrinks, G-8 Stops Short

The dollar fell the most against the euro in more than a week as New York state manufacturing shrank in June and the Group of Eight's weekend finance ministers' meeting stopped short of calling for a strong U.S. currency.

An index tracking the dollar against the currencies of six U.S. trading partners dropped from the highest level since February. The Norwegian krone was the biggest gainer versus the dollar among the major currencies and the Canadian dollar appreciated the most in almost a month as crude oil surged to a record $139.89 a barrel.

``There's further room for disappointment for dollar bulls,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York. ``The economy is still weak. There was too much expectation for the G-8 to say something to support the dollar.''

The dollar declined 0.7 percent to $1.5482 per euro at 1:54 p.m. in New York, from $1.5380 on June 13. The U.S. currency traded at 108.18 yen, compared with 108.19. The yen dropped 0.7 percent to 167.46 versus the euro, from 166.35, and touched 167.68, the weakest level since Oct. 15.

The U.S. currency weakened 0.9 percent to 5.1787 against the Norwegian krone and 0.7 percent to C$1.0224 versus the Canadian dollar as crude oil surged. Commodities such as oil and gold make up half of Canada's exports, while Norway is the world's fifth-largest oil producer.

The dollar also fell against the euro as crude oil for July delivery rose to $136.79 a barrel after touching the all-time high. The correlation of the dollar against the euro and oil prices is minus 0.93 for the past year, according to Bloomberg calculations based on value changes, indicating they have moved in the opposite direction 93 percent of the time.

`Under Pressure'

``As long as oil keeps rallying, the dollar will be under pressure,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York.

The yen fell to an eight-month low versus the euro as reduced currency volatility encouraged investors to buy higher- yielding assets funded by low-cost loans in Japan.

Japan's currency dropped 0.8 percent to 212.43 versus the pound and 0.5 percent to 81.50 against the New Zealand dollar as investors increased carry trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 2 percent in the U.S., 4 percent in the euro zone, 5 percent in the U.K. and 8.25 percent in New Zealand.

The risk that fluctuating exchange rates will erase carry- trade profits fell. Implied volatility on one-month euro-yen options dropped for a fourth day, declining to 10.09 percent, from 10.31 percent on June 13.

Dollar Versus Yen

The dollar will rise to 110 against the yen by year-end, compared with a previous estimate of 103, and will climb to 112 by the end of March, compared with a previous forecast of 105, Tokyo-based JPMorgan Chase & Co. currency strategists Tohru Sasaki and Junya Tanase wrote in a research note today.

The U.S. Dollar Index traded on ICE futures decreased for the first time in three days, falling 0.6 percent to 73.73. It touched 74.314 on June 13, the highest since Feb. 28.

A gauge of New York manufacturing dropped, sending the dollar lower versus the euro. The Federal Reserve Bank of New York's general economic index decreased to minus 8.7 in June from minus 3.2 the prior month. Readings less than zero signal contraction.

The euro rose earlier versus the dollar after the European Union's statistics office reported that the annual inflation rate accelerated to 3.7 percent in May, the highest level since June 1992.

G-8 Meeting

The G-8, which comprises the U.S., Japan, Russia, Germany, France, the U.K., Italy and Canada, stuck to its practice over the weekend of not making a joint comment on currencies when central bankers are absent.

``The world economy continues to face uncertainty, and downside risks persist,'' G-8 officials said in a statement on June 14 after a meeting in Osaka, Japan. ``Elevated commodity prices, especially of oil and food, pose a serious challenge.''

The U.S. currency rose last week the most against the euro since 2005 as Fed Chairman Ben S. Bernanke said economic risks have faded, raising speculation policy makers will increase borrowing costs this year to contain inflation. The yield on the two-year Treasury note posted its biggest weekly increase in 26 years last week, rising 66 basis points to above 3 percent.

``The perception that the Fed will hike rates is still strong,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Short-term rates have risen quite sharply the last couple of weeks, and that will keep the dollar sustained.''

The dollar will strengthen 3 percent to $1.50 per euro by year-end, according to the mean forecast of 39 firms surveyed by Bloomberg News.