Dollar Declines Against Euro After Drop in U.S. Factory Orders

By Bo Nielsen and Gavin Finch

Oct. 4 (Bloomberg) -- The dollar fell against the euro and yen for the first time in four days as a drop in U.S. factory orders suggested the housing recession is slowing the economy.

The U.S. currency rose earlier against the euro after the European Central Bank held its benchmark lending rate at 4 percent and ECB President Jean-Claude Trichet signaled policy makers aren't likely to raise borrowing costs soon.

``The U.S. economy is really not out of the woods yet,'' said Alan Kabbani, senior currency trader in Charlotte, North Carolina, at Wachovia Corp. ``The factory number reminded people of this.''

The dollar decreased 0.28 percent to $1.4129 per euro at 12:06 p.m. in New York. It touched the all-time low of $1.4283 on Oct. 1. The U.S. currency fell 0.12 percent to 116.61 yen. The euro rose 0.15 percent to 164.75 yen.

Orders placed with U.S. factories fell a more-than-expected 3.3 percent in August after a revised 3.4 percent increase in July that was smaller than previously estimated, the Commerce Department said today in Washington.

The number of workers filing first-time claims for unemployment benefits rose last week, the Labor Department reported today. Applications increased to 317,000, higher than forecast, in the week that ended Sept. 29.

The Labor Department will probably say tomorrow that U.S. employers added 100,000 jobs last month after a loss of 4,000 jobs in August, according to the median forecast of 83 economists surveyed by Bloomberg News.

Interest-rate futures show traders bet there's a 68 percent chance of a Federal Reserve rate cut at the Oct. 31 meeting. The likelihood was 28 percent a month ago.

ECB's Decision

The Frankfurt-based ECB held its key rate steady on concern the U.S. housing slump and a rising euro may curb the expansion of the euro zone's $10.4 trillion economy. Only one of 55 economists surveyed by Bloomberg News had forecast an increase to 4.25 percent.

``It remains necessary to gather additional information and examine new data before drawing further conclusions for monetary policy,'' Trichet said at a news conference in Vienna today.

Trichet said that while the bank's outlook on growth ``has not been modified,'' he said ``downside risks'' had increased. He expected inflation rate to remain ``significantly'' above 2 percent this year and in early 2008 before moderating.

``The ECB's hands are tied,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. Policy makers ``see a risk of inflation, but the credit market conditions remain tight, and the economic outlook has deteriorated.''

Rate Outlook

The implied yield on December's Euribor futures contract fell 0.03 percentage point to 4.59 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 0.16 percentage point above the ECB's key rate since 1999.

Trichet urged politicians to show ``verbal discipline'' when discussing the euro's exchange rate. Italian Prime Minister Romano Prodi said yesterday in Rome that he and German Chancellor Angela Merkel spoke briefly and expressed concern over the 13-nation currency's strength.

The euro's appreciation is clearly ``an issue for Europe right now,'' Fed Governor Frederic Mishkin said today after presenting a research paper in Frankfurt.

The comments have stoked expectations that policy makers of the ECB, the 27-member European Union and the Group of Seven nations will discuss currencies at meetings in Washington that begin Oct. 19.

``The ECB has never intervened unilaterally,'' said Naomi Fink, senior currency strategist in New York at BNP Paribas SA. ``That means the greatest likelihood will be multilateral intervention.''

The Bank of England today left its benchmark interest rate at 5.75 percent, a six-year high. The pound rose 0.3 percent versus the dollar.