By Chris Gothard
London, July 17 (Bloomberg) -- The dollar, which is almost 10 percent higher against the euro this year, gained amid expectations the U.S. economy will rebound, while growth in Europe and Japan slows.
``The dollar will continue to strengthen this year,'' said Tony Robinson, chief investment officer at Attica Asset Management, which runs about $200 million of assets. ``There is a recovery in the U.S. economy -- the worst has been seen. I can't say the same for Europe or Japan.'' He recently increased his holdings in U.S. equities.
Evidence of recovery in the world's largest economy has grown in recent days as reports showed rising retail sales in June and consumer confidence in July. Better growth prospects attract investors to dollar-denominated assets. Even so, industrial production probably fell again last month, a report today will show.
The dollar strengthened to as much as 84.92 U.S. cents per euro from 85.50 in London late yesterday, before trading recently at 85.20. Against the yen, it was little changed at 125.17 yen per dollar from 125.42.
``The whole story of this year is the market reassessing U.S. growth,'' said Shahab Jalinoos, a currency strategist at UBS Warburg LLC in London. He sees the dollar rising to 83 cents per euro in three months. Federal Reserve Chairman Alan Greenspan ``will reaffirm people's expectations of a recovery tomorrow'' in testimony before the House Financial Services Committee, he added.
Industrial Production
Production probably fell 0.5 percent in June, the ninth straight decline, analysts surveyed by Bloomberg News said. The report is due at 2:15 p.m. London time. Production fell 0.8 percent in May.
Still, business inventories were unchanged in May as sales rose more than in any month since March of last year, a report yesterday showed, a sign a pickup in the economy may boost production months from now.
``Most people accept there is going to be a U.S. economic recovery,'' said John Kyriakopoulos, a currency strategist at J.P. Morgan Securities Inc.
The Fed has cut the target rate for overnight loans between banks six times this year to a seven-year low of 3.75 percent to revive the economy. Gross domestic product grew at the slowest pace between October and March since the recession year of 1991.
The European Central Bank, by contrast, has trimmed rates by a quarter point once, even as economic growth among the dozen nations sharing the euro has slowed. Policy makers have cited concern over faster inflation, which reached 3.4 percent in May, the most since the euro's inception in 1999.
Europe `Not Attractive'
``They're not making any effort to boost growth by cutting rates,'' said Robinson at Attica. ``There is also an inflation problem -- it's not attractive to the investor.''
Investors have scaled back their expectations for ECB rate reductions. The implied yield on the three-month Euribor interest rate futures contract maturing in September was 4.28 today, compared with 4.2 percent a month ago.
Italian consumer prices rose 0.3 percent in June and 2.9 percent from a year earlier, the government confirmed today. That's the 19th straight month that inflation in the region's third-largest economy exceeded the 2 percent annual ceiling set by the ECB.
Ernst Welteke, President of the Bundesbank and a member of the ECB's governing council, said yesterday it was difficult to judge whether evidence of slowing inflation was ``a lasting development.'' That may reduce expectations of a rate cut from the central bank in coming months, said Jalinoos at UBS.
Pfizer
While signs of pickup have emerged in the U.S., reports in the nations sharing the euro suggest growth is still slowing. Italian industrial production grew less than expected in May, a report yesterday showed, while production in France, the region's second-largest economy, is likely to contract for a second consecutive month, according to analysts surveyed by Bloomberg News.
Pfizer Inc., the No. 1 drugmaker, said today the dollar's strength against other currencies will reduce revenue by $900 million for 2001.
The yen was little changed after Bank of Japan Governor Masaru Hayami said the ``downside risk'' to the Japanese economy was increasing.
``We expect the economic news to continue to get worse,'' said Jalinoos at UBS. He predicts the yen falling to 130 per dollar in the next three months.
Hayami also said he didn't expect to ``see a drastic decline in the yen.'' The Bank of Japan governor has been trying to stem a decline that has left Japan's currency down almost 9 percent this year, analysts said. Just last week he said ``it's no problem'' if the yen rallies and the currency will ``rebound.''