Euro Declines to Lowest Level This Year as ECB Cites Weakness

By Ye Xie and Agnes Lovasz

Sept. 4 (Bloomberg) -- The euro fell to the lowest level against the dollar this year as European Central Bank President Jean-Claude Trichet said the countries that use the currency are in an ``episode of weak activity.''

The 15-nation euro dropped against the yen and the pound after Luxembourg Finance Minister Jean-Claude Juncker said the currency is ``overvalued.'' The yen rose against the dollar, the Brazilian real and the Danish krone on speculation the global economic slowdown led investors to reduce holdings of higher- yielding assets and pay back loans made in Japan.

``Trichet didn't provide any fuel to thoughts that the ECB will be easing soon, but the market is inclined to focus on his assessment of downside risk to growth,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The tone of the market has shifted dramatically to be more constructive for the dollar.''

The euro dropped 1 percent to $1.4354 at 2 p.m. in New York, from $1.4498 yesterday. It touched $1.4326, the lowest since Dec. 21. The euro fell for the first time in eight days versus the pound, dropping 0.7 percent to 81.03 pence after touching a record high of 81.88. The euro slipped 1.8 percent to 154.15 yen, from 157.01, after touching 153.98, the lowest since March 24. The dollar fell 0.8 percent 107.39 yen, from 108.29.

South Korea's won advanced against all of the major currencies, rising 1.7 percent to 1,129.02 per dollar, after Finance Minister Kang Man Soo said yesterday on KBS-TV in Seoul that the country doesn't face a crisis similar to the 1997 meltdown. Asia's worst performer against the dollar this year touched a four-year low of 1,159.05 yesterday.

Weaker Sterling

Sterling fell 0.3 percent to $1.7711 as the Bank of England kept its target lending rate at 5 percent today. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.

The euro dropped for a sixth day against the dollar, its longest decline since October 2006. The ECB kept its main refinancing rate at a seven-year high of 4.25 percent to curb inflation running at the fastest pace in more than 16 years even amid signs of a deepening economic slowdown. Trichet said at a press conference that ``upside risks to price stability prevail'' and growth risks are on the ``downside.''

Europe's currency extended its decline after Juncker told reporters that the euro is ``effectively overvalued'' not only against the dollar but against other currencies.

``Juncker's comments pushed the euro lower,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It's a bit of an overshoot. It reflected a market that really wants to buy dollars.''

Stronger Yen

The yen rose 2.9 percent to 62.60 against the real and 1.8 percent to 20.67 versus the Danish krone as the weakening global economy encouraged investors to pare carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.

Japan's benchmark interest rate of 0.5 percent compares with 13 percent in Brazil and 4.25 percent in Denmark. The Standard & Poor's 500 Index shed 1.8 percent.

``The market remains fearful of another `credit event,''' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Demand for safe-haven currencies should rise. Tightening credit standards force hedge funds out of these carry positions.''

The euro has dropped 6.4 percent versus the dollar since Aug. 7, when Trichet said growth in the countries using the euro will be ``particularly weak'' through the third quarter.

ECB Growth Outlook

The ECB today lowered its 2008 economic growth forecast to about 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. The central bank raised its inflation forecast for this year to 3.5 percent from 3.4 percent and 2.6 percent from 2.4 percent for 2009.

``It's very tough for them to cut rates,'' said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs Group Inc.

The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, touched 78.72 today, the highest level since October.

Technical analysis shows the euro may fall to $1.4360 in the next few days, said Masashi Hashimoto, a currency analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed bank.

The euro is poised to decline because its average price over the past 200 days is starting to fall, he said. Support at $1.4360, where euro buy orders are concentrated, is a 38.2 percent retracement of the euro's rise from a low of $1.1640 on Nov. 15, 2005, to its record high of $1.6038 set July 15, according to a series of numbers known as a Fibonacci sequence.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: September 4, 2008 14:02 EDT