Euro Falls as Trichet Signals One Rate Increase May Be Enough

July 3 (Bloomberg) -- The euro fell the most against the dollar in more than two months after European Central Bank President Jean-Claude Trichet signaled that he may not increase interest rates again.

The 15-nation euro also dropped against the pound as Trichet said that he has ``no bias'' or ``pre-commitment'' following the decision to raise the ECB's main refinancing rate by a quarter-percentage point to 4.25 percent.

``Trichet obviously disappointed market expectations,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, the world's largest custodial bank, with about $23 trillion in assets under administration. ``He wants to start with a clean slate, and that has taken away a lot of expectations of further rate hikes.''

The euro dropped 1.2 percent to $1.5688 at 12:32 p.m. in New York, from $1.5882 yesterday. It rose to the all-time high of $1.6019 on April 22. Against the pound, the euro deceased 0.6 percent to 79.20 pence, from 79.70 pence. The dollar appreciated 0.8 percent to 106.71 yen, from 105.91. The euro fell 0.5 percent to 167.40 yen, from 168.20.

Today's interest-rate increase will help the central bank bring inflation back below 2 percent, Trichet said at a press conference in Frankfurt. Economic growth may weaken to 1.5 percent next year from 1.8 percent this year and 2.6 percent in 2007, according to ECB staff.

Trichet's comments helped counter a Labor Department report showing U.S. employers eliminated jobs in June for a sixth consecutive month.

`To the Sidelines'

``The ECB is moving to the sidelines,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``It does not mark a sharp turnaround for the euro-dollar. But it took some steam out of the euro's rally.''

Traders reduced bets the ECB will increase rates further this year. The implied rate on the December Euribor interest- rate futures contract fell to 5.14 percent, from 5.28 percent yesterday. The yield advantage of two-year German bunds over comparable-maturity Treasury notes decreased to 1.92 percentage points, making the European securities less attractive to investors. The difference was 2.05 percentage points yesterday, the widest since June 6.

Sweden's krona strengthened the most against the euro since June 2007 after the Riksbank raised its benchmark interest rate to 4.5 percent and said it may lift it again. The krona rose 0.8 percent to 9.4088 per euro.

Trading Range

The dollar has traded in a range of about $1.53 to $1.59 per euro in the past two months. The currency needs to weaken beyond $1.6020 to break out of the range and head for a decline to $1.67, wrote Kevin Edgeley, a London-based technical analyst at Goldman Sachs Group Inc., in a research note today. He uses charts to predict movements in currencies.

The U.S. currency has lost 11 percent against the euro since the Fed made the first of seven reductions in the target lending rate from 5.25 percent in September, helping to drive the price of crude oil to record highs. Chairman Ben S. Bernanke said in early June that he's ``attentive'' to the effect of the dollar's decline on inflation.

Crude oil for August delivery touched $145.85 today, the highest since trading began in 1983. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

`Hardly Bullish'

``With oil continuing its way to $150 a barrel, it's hard for the euro to drop,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The outlook for the dollar is hardly bullish.''

U.S. payrolls fell by 62,000 last month, following a revised decline of 62,000 in May, the Labor Department said today in Washington. The median forecast of 81 economists surveyed by Bloomberg News was for a reduction of 60,000. The jobless rate remained at 5.5 percent after jumping in May by the most in two decades.

``Soft employment will have an impact on consumers,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``There's still a good chance we're going to test the old highs,'' he said of the euro.

Futures on the Chicago Board of Trade showed an 18 percent chance the Fed will increase its target rate for overnight lending between banks by a quarter-percentage point at its Aug. 5 meeting, compared with 25 percent odds yesterday.

The greenback dropped 1.2 percent against the euro last week in its second consecutive weekly loss after the Fed gave no indication that it will start reversing the most aggressive series of cuts in two decades.