The euro fell as low as $1.5008 Friday afternoon, dropping more than 2% from $1.5325 Thursday – the biggest one-day drop since Sept. 6, 2000. Against the yen, the European currency traded at 165.84, from 167.70. In the dollar rally, the euro has declined 3.1% against the greenback in its fourth weekly decline.

In addition to rising against the euro, the greenback climbed 0.5% to 109.97 yen after touching 110.08, the strongest since Jan. 10, Bloomberg News reported. The U.S. currency advanced 2.1% in its biggest weekly gain since June.

“This is the beginning of a new chapter for the dollar as [ECB President Jean-Claude Trichet] and other central banks are paying more attention to the downside risk to growth,” said Dustin Reid, a senior currency strategist at ABN Amro Holding NV (OTC ADR: ABNYY), told Bloomberg. “The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.”

Trichet said Thursday that while growth would be “particularly weak” in the second and third quarters, inflation is “likely to remain well above levels consistent with price stability for a protracted period of time.”

European retail sales dropped by the largest margin in at least 13 years in June, sliding 0.6%. Business and consumer confidence plunged in the 15 countries using the euro in July, as the EU’s economic sentiment indicator fell to 89.5 – the lowest level since March 2003 and the sharpest month-to-month drop since October 2001.

Italy’s economy unexpectedly shrank in the second quarter, coming closer to its fourth recession in a decade. The economy, contracted 0.3% after expanding 0.5% in January to March.

It’s likely that Germany’s economy is shrinking as well. Germany’s factory orders for June fell 2.9% in June, after a 1.4% decline in May, leading economists to speculate that economic growth in Europe’s largest economy is contracting.

The German economy contracted by 1% in the second quarter, and Eurozone growth may was flat at best, economists at BNP Paribas SA (OTC: BNPQY) said in a research note.

Dire growth prospects outside the United States have also lead to a steep drop in commodities prices. Oil plunged $4.82, or 4%, settling at 115.20. Oil has now plummeted more than 20% from its July 11 record of 147.27. Gold fell $15.50, or 1.77%, Friday to $862.40 an ounce. The prices of other metals and crops sank as well.

“The dollar is, in my view, in a genuine recovery,” Stephen Jen, global head of currency strategy at Morgan Stanley (MS) in London, told Reuters. “This trend could run further than many think,” said.

Source: Turbulence in the European Economy Sparks a Dollar Rally

The Financial Times reported yesterday (Thursday) that one large, unnamed Gulf fund has cut its dollar-denominated holdings from more than 80% a year ago to less than 60%. Also, China’s State Administration of Foreign Exchange (SAFE) has been actively seeking deals with private equity firms in Europe as part of a specific strategy to reduce its dollar holdings.

A shift in policy at China’s SAFE is particularly significant because it holds the vast majority of China’s $1.6 trillion of foreign currency reserves in dollar-denominated assets. In addition, the FT reported, SAFE is encouraging the private equity firms with which it works to invest in natural resources companies in markets outside of the United States.

With U.S. markets roiled by the subprime meltdown, overseas investors are questioning the credibility of the Federal Reserve and Treasury Department when it comes to defending the dollar and maintaining financial stability.

“I thought the problem of off-balance sheet had gone way with Enron,” the head of one Middle East fund told the FT.

While the shift may seem sudden, Rick Lloyd, head of G10 currency trading at ABN AMRO (OTC ADR: ABNYY) in Singapore, told Reuters that central banks and sovereign wealth funds have been scaling back their exposure to the dollar for some time now.

“That’s something that’s been happening over the course of time, there’s been a supply of dollars on any given rally,” Lloyd said. “The dollar just seems to be getting pushed around in the backwater flows in other markets at the moment.”

Inflation has clearly taken root in the U.S. economy with energy costs leading the way. Worse, continued stress throughout the financial markets, highlighted by difficulties at Fannie Mae and Freddie Mac last week has prohibited the Federal Reserve from raising its benchmark interest rate.

U.S. consumer prices, as measured by the Consumer Price Index (CPI), increased 1.1% in June, bringing the inflation rate for the past 12 months to 5%, well above the U.S. Federal Reserve’s preferred target of 2.0%.

“We have a stagnating economy with rising inflation,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in a note to clients after the CPI report was released. “Clearly, the rate of inflation and the slowdown in economic growth is nothing near what we saw in the 1970s, but the combination of the two is creating real problems for the Federal Reserve.”

The dollar wobbled against the euro yesterday, but the single European currency in late-day trade was at $1.5866 dollars after 1.5821 dollars late Wednesday, the AFP reported.

Source: Sovereign Wealth Funds Reducing Exposure to U.S. Dollar

The counter bid – announced mid-afternoon today (Friday) – was made necessary after Halliburton trumped Candover’s bid earlier today. The Candover-led consortium’s original $3.2 billion bid had been launched on April 17.

The Halliburton bid represented a 6.2% premium over that original offer. Analysts said they expected Candover would respond with a higher bid – a correct assumption, as it turns out – but noted that they ultimately expected Halliburton to be the winner.

“I expect then Halliburton to top Candover’s bid and become the winner, unless there’s another industrial player,” Jane Coffey, head of equities at Royal London Asset Management, said earlier today in a telephone interview with Bloomberg News.

What analysts such as Coffey hadn’t counted upon, however, was the speed with which Candover came back with a new bid. That quick response is now leading some analysts to predict that Expro will take the slightly higher offer without waiting for a possible counteroffer from Halliburton.

“If I’m Expro, I’m like, ‘No, you had four weeks doing due diligence,’” James Wicklund, of Carlson Capital LLC in Dallas, told Bloomberg. “‘If you want to raise your bid, raise your bid. How many times do you need to go through the underwear drawer to know what you have?’”

Surging demand for oil from developing economies such as China and India have pushed oil to record levels over the past year. Just this week, West Texas intermediate crude crossed the $135-a-barrel threshold.

With oil commanding such a high price, Halliburton and its larger rival Schlumberger Ltd. (ADR: SLB), have profited as oil-rich nations have turned to the oil-services firms for help with excavation and exploration, forgoing the assistance of international oil majors, in hopes of keeping a larger chunk of revenue for state coffers.

At the same time oil demand is skyrocketing, some of the easy-to-reach oil deposits are starting to dry up, forcing the oil majors to experiment with more-challenging and – and much-more costly – deep-sea drilling expeditions. Oil at $135 a barrel can cover the cost of hard-to-reach sites that were previously considered financially unfeasible, making a company with Expro’s technology and experience a valuable asset.

Such heavy-hitters as Exxon Mobil Corp. (XOM), BP PLC (BP), Total SA (TOT), Chevron Corp. (CVX), ConocoPhillips (COP), and Royal Dutch Shell PLC (RDS.A, RDS.B), will spend a record $98.7 billion this year on exploration and production, according to Lehman Bros. Holdings Inc. (LEH).

And some of that almost $100 billion in exploration and production fees is bound to end up in the pockets of Expro, given that it’s among the leaders in deep-sea oil exploration. The firm’s experience with underwater wells at levels deeper than 1,000 meters (3,281 feet) would be a nice complement to Halliburton’s existing services.

Many analysts feel the deal makes too much sense for Halliburton to pass up.

“The consortium is private equity, with returns that need to be made – the higher their bid, the lower their returns,” Phillip Lindsay, an analyst with ABN Amro Holding NV (OTC: ABNYY), told Forbes. “I would say Halliburton is in a stronger financial position. I certainly think Halliburton could bid higher.”

Source: Halliburton Offer Sets Off Bidding War for Deep Sea Oil Expert