Euro Trades Near 1-Week High Versus Dollar Before German Report

June 22 -- The euro traded near a one-week high against the dollar before a German report that may show business confidence rose to the strongest level in seven months, adding to signs the global economy is emerging from recession.

The yen ended three days of losses versus the euro on concern the political situation in Iran may deteriorate following one week of clashes between police and protestors, spurring demand for safer assets. The Dollar Index was close to the lowest in more than a week on speculation the Federal Reserve will this week signal it plans to keep borrowing costs low, damping demand for U.S. investments.

“German sentiment is expected to improve, implying the European Central Bank may leave rates unchanged next month,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-biggest bank. “The euro will probably strengthen.”

The euro traded at $1.3935 as of 8:44 a.m. in Tokyo from $1.3937 last week in New York. It climbed to $1.4033 on June 15. European currency fell to 133.90 yen from 134.18. The dollar dropped to 96.14 yen from 96.27.

The Ifo institute in Munich will say today its business climate index, based on a survey of 7,000 executives, increased to 85 this month from 84.2 in May, according to a Bloomberg News survey, showing signs the recession in Europe’s largest economy is easing. The index reached a 26-year low of 82.2 in March.

Rate Futures

Interest-rate futures indicated a 44 percent chance the U.S. central bank will boost its target rate to at least 0.5 percent by December, down from 55 percent odds a week ago.

The greenback will remain “on defensive” before the Federal Open Market Committee’s policy meeting this week, wrote Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London, in a research note last week.

“It is notable that between August 2003 to January 2004, when the Fed committed to maintaining policy accommodation for a ‘considerable’ period, the Dollar Index trended lower,” Hardman wrote. “The adoption of a similar approach by the FOMC next week to dampen tightening expectations before year-end will ultimately prove a similarly bearish development for the dollar this time around.”

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, lost almost 10 percent from August 2003 to January 2004. The gauge of the dollar was little changed at 80.394.

BOJ’s Rate

Speculation the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which was kept at 0.1 percent at a meeting last week.

The BOJ should consider whether to stop pumping extra cash into the banking system by evaluating trends in corporate financing and the economy, according to minutes of the May meeting released June 19.

They said whether to keep buying corporate debt from banks and providing them with unlimited loans after Sept. 30 “should be determined based on close examination of developments in financial markets and corporate financing,” according to minutes of the May 20-21 meeting.

Splits within Iran’s ruling elite deepened, with police arresting family members of an ex-president and a former nuclear negotiator saying most Iranians questioned President Mahmoud Ahmadinejad’s electoral victory.

Security forces detained five relatives of former President Ali Akbar Hashemi Rafsanjani, one of the most influential politicians in the country, state media said yesterday.