Euro Slumps to Five-Month Low on Reduced Bets for Higher Rates

By Anchalee Worrachate and Stanley White

Aug. 8 (Bloomberg) -- The euro slumped to a five-month low against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.

The euro also fell to a three-week low versus the yen after ECB President Jean-Claude Trichet said economic growth will be ``particularly weak'' through the third quarter and policy makers kept the benchmark rate unchanged yesterday. The New Zealand and Australian dollars led losses among the most-traded currencies on speculation central banks will cut borrowing costs. The U.K. pound sank to the weakest in 17 months against the dollar as Royal Bank of Scotland Group Plc posted its first loss in 40 years.

``Trichet said more dovish sentences than people had expected, even as the number of hawkish sentence probably stayed the same,'' said Geoffrey Yu, a currency strategist in London at UBS AG. ``People in the market are pricing out any chance of European rate hikes ahead. The euro will be struggling to rebound.''

The euro declined 1.1 percent to $1.5164 as of 9:35 a.m. in London and reached $1.5141, the lowest level since Feb. 28, from $1.5325 yesterday in New York. Against the yen, the European currency traded at 166.68, from 167.70.

Trichet said yesterday he has ``no bias'' or ``pre- commitment'' toward future rate movements after the central bank left the main refinancing rate at 4.25 percent. He told reporters in Frankfurt that while inflation remains a threat, risks to economic growth are ``materializing.''

Rate Bets

European retail sales dropped by the most in at least 13 years in June, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the European Commission said July 30.

Traders pared bets the ECB will lift rates a second time this year after increasing its main rate by a quarter-point to 4.25 percent last month. The implied yield on the December interest rate futures, an indication of expectations, has retreated 21 basis points from the previous meeting, to 4.94 percent today.

``We do not expect a significant recovery in the euro from current levels,'' Ashley Davies, a currency strategist in Singapore at UBS AG, the world's second-largest foreign-exchange trader, wrote in a research note today. ``Trichet delivered fairly standard comments, which were interpreted in a dovish fashion.''

The New Zealand dollar slumped 2.3 percent to 70.18 U.S. cents, the biggest loss in two months and the largest among the 16 most-traded currencies, as investors added to bets the central bank will cut its 8 percent benchmark rate next month. Australia's dollar dropped 1.5 percent, falling for a fourth day, to 89.27 U.S. cents, from 90.66 cents yesterday.

Pound Slumps

The Reserve Bank of Australia said it may lower borrowing costs, after keeping its benchmark interest rate at a 12-year high of 7.25 percent this week.

The pound fell below $1.93 for the first time since March 2007 as the Bank of England kept its main interest rate steady at 5 percent yesterday after inflation accelerated and the economy teetered on the brink of a recession. It was at $1.9277, from $1.9439. The currency is poised for its biggest weekly drop in three years.

Singapore's dollar fell the most in two years, contributing to the biggest weekly drop since June 1998, on concern a slowing economy will prompt the central bank to favor a weaker currency.

The local dollar slid 0.7 percent to S$1.40, leading losses among Asian currencies.

Russia's ruble fell the most in 2 1/2 years against the dollar-euro basket after Georgia's Interior Ministry said four Russian fighter-jets entered Georgian airspace and bombed the towns of Gori and Kareli near the breakaway region of South Ossetia, bringing the two former Soviet republics closer to war.

The ruble dropped as much as 0.7 percent against the basket, the most since January 2006.

Weekly Moves

The euro is headed for a fourth weekly decline against the dollar, the worst losing streak since May 2007. The euro weakened to 166.52 yen, from 167.70 yesterday and 167.55 at the end of last week. It reached 166.46 yen, the lowest since July 17.

The U.S. currency headed for its biggest weekly gain against the yen in almost two months as oil dropped 18 percent from a July 11 record of $147.27 a barrel.

``Oil prices have turned out to be much more supportive of the dollar than I expected,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It does temporarily relieve some concern that the U.S. economy will weaken further. This is a plus for sentiment.''

Losses in the yen against the dollar may accelerate on speculation a slowing economy will prevent the Bank of Japan from raising interest rates from 0.5 percent, the lowest among industrialized economies.

Possible Recession

There is ``a high possibility'' the economy has entered a recession, Shigeru Sugihara, head of business statistics at the Cabinet Office in Tokyo, said on Aug. 6. Gross domestic product shrank an annualized 2.3 percent in the three months ended June 30, according to the median estimate of economists surveyed by Bloomberg. The report is due on Aug. 13.

``Officials confirmed Japan may have entered a recession,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``This is a catalyst for Japan selling, such as Japanese stocks and the yen. With interest rates low, Japanese investors will keep sending money abroad.''

Two-year German notes rose, pushing the yield down to 4.05 percent, a difference with similar-maturity U.S. Treasury notes of 1.61 percentage points compared with 1.92 points a month ago.

The euro may fall to $1.5170 against the dollar should it stay below technical support around $1.5227, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The so-called support level of $1.5227 represents its 200-day moving average, Hashimoto said. The next target of $1.5170 represents a 50 percent retracement from the euro's record high of $1.6038 on July 15, based on a series of numbers known as the Fibonacci sequence.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: August 8, 2008 05:23 EDT