Dollar Rises From Record Low Versus Euro on Signs of Growth

May 5 (Bloomberg) -- The dollar rose from a record low against the euro as private reports showing resilience in U.S. manufacturing and services industries reduced concern over a slowdown in the world's largest economy.

The U.S. currency also touched a two-month high versus the yen this week as April data showed manufacturing was the strongest in almost a year and services including banking and retailing grew the fastest in three months. The gain may fizzle on bets the European Central Bank will signal further increases in borrowing costs while the Federal Reserve holds its benchmark rate steady at policy meetings next week.

``The dollar was on a winning note'' as the data ``removed some of the pessimism over the near-term U.S. outlook,'' said Brian Dolan, research director at Forex.com, a unit of online currency trader Gain Capital in Bedminster, New Jersey. ``Next week should see the dollar resume weakening as the interest rate outlook still favors the euro against the dollar. The long-term trend of a lower dollar remains intact.''

The dollar rose 0.45 percent to $1.3591 per euro this week, rebounding from a record low of $1.3681 on April 27 and snapping a five-week losing streak. The dollar advanced 0.47 percent to 120.18 yen over the same period. It touched 120.47 yen, the strongest since Feb. 27, when stocks tumbled in a global rout.

`Cut Short'

The Australian dollar was the biggest loser against the dollar among 16 major currencies this week, falling 1 percent to 82.15 U.S. cents after the country's central bank cut its inflation forecast, weakening the case for increased borrowing costs. South Africa's rand was the top performer, rising 1.76 percent to 6.9280 versus the U.S. dollar.

The U.S. currency pared its gains this week as slowing growth in the jobs market led investors to raise bets of an interest rate cut by the U.S. central bank.

``The dollar's recovery was cut short by the weaker-than- expected U.S. employment data,'' said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. ``The main force that has weighed on the dollar will likely continue to exert its pull.''

The U.S. unemployment rate rose to 4.5 percent from the five-year low of 4.4 percent as employers added 88,000 non-farm jobs in April, following a revised 177,000 the previous month, the Labor Department reported yesterday in Washington. The median forecast of 85 economists surveyed by Bloomberg News was for a gain of 100,000.

Benchmark Rates

The Tempe, Arizona-based Institute for Supply Management said this week its April manufacturing index rose last month to 54.7, the highest since May 2006, from 50.9 the previous month, while its index of non-manufacturing businesses rose last month to 56, the highest since January, from 52.4 in March. A level above 50 indicates expansion.

The Fed has kept its target rate for overnight lending between banks at 5.25 percent since lifting it to that level in June. The European Central Bank has raised its rate seven times since November 2005 to 3.75 percent. The Bank of England's rate is 5.25 percent. Policy makers of all three central banks are scheduled to meet to set rates next week.

``Growth and interest rate expectations are conspiring against the dollar,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York. ``A lower dollar is still the trend.''

The dollar has lost almost 3 percent against the euro and about 1.7 percent versus the pound since the start of the year. The Fed's Trade Weighted Major Currency Dollar Index dropped to 78.91 on April 30, the lowest in its 36-year history.

Yield Advantage

The yield advantage of two-year U.S. Treasury notes over similar-maturity German bunds dropped to 0.465 percentage point on May 2, the narrowest since November 2004. A narrowing yield gap dims the allure of dollar-denominated assets.

Yields on interest rate futures fell following the payroll report, indicating traders raised bets the Fed will lower borrowing costs this year.

The yield on Eurodollar futures for December declined to 5.08 percent yesterday from an almost three-week high of 5.105 percent a day earlier. The contracts' value at settlement is based on the interest rate on three-month bank deposits, which is influenced by the federal funds rate target.

``We have an ECB that remains hawkish,'' said Simon Derrick, chief currency strategist in London at Bank of New York.

Euro Outlook

UBS AG raised its forecast yesterday for the euro to $1.40 by year-end, saying it expects the ECB to increase its key rate to 4.75 percent by mid-2008.

The euro was little changed this week against the yen, trading at 163.32 compared with 163.27 on April 27.

The 13-nation currency rose to an all-time high of 163.60 yen on May 3 on bets the ECB will outpace the Bank of Japan in raising borrowing costs, enhancing the appeal of euro- denominated assets. The BOJ's rate is 0.5 percent, the lowest among major economies. Before this week the euro posted eight straight weekly gains versus the yen.