Euro Falls to 13-Month Low Versus Dollar After ECB Debated Cut

By Kim-Mai Cutler

Oct. 2 (Bloomberg) -- The euro fell to a 13-month low against the dollar and the weakest in two years versus the yen after European Central Bank President Jean-Claude Trichet said policy makers discussed cutting interest rates.

Europe's currency dropped for a fourth day against the dollar as Trichet said recent data suggest ``increased downside risks'' to growth. Traders increased bets on a cut in the main refinancing rate in coming months after the ECB held it at a seven-year high of 4.25 percent.

``The euro is under pressure across the board,'' said Marcus Hettinger, a Zurich-based currency strategist at Credit Suisse Group. ``The next move in rates will be down. It's more a question of time.''

The euro declined 1.3 percent to $1.3833 at 12:27 p.m. in New York, from $1.4009 yesterday. It touched $1.3748, the weakest level since September 2007. The euro sank 1.6 percent to 145.72 yen, from 148.11, and reached 144.89, the lowest level since June 2006. The dollar depreciated 0.4 percent to 105.28 yen, from 105.71.

The euro has slid 5.6 percent this week, the biggest four- day drop since the currency's debut in 1999. The drop reduces the likelihood of coordinated action by central banks to support the dollar, which has dropped more than 17 percent against the 15-nation currency in the past five years.

It may also help European exporters such as Fiat SpA, Volkswagen AG and Airbus SAS just as the region heads toward a recession. French Finance Minister Christine Lagarde said Sept. 11 she welcomed the euro's decline to below $1.40. Belgium's Didier Reynders said a weaker euro reflected ``fundamentals.''

Euribor Futures

The implied yield on the Euribor futures contract expiring in March was at 4.16 percent today, compared with 4.77 percent a month ago. The euribor contract has been an average of 43.8 basis points higher than the ECB's overnight rate during the past two years, Bloomberg data show.

``The economic outlook is subject to increasing downside risks,'' mainly ``stemming from ongoing financial-market tensions,'' Trichet said at a Frankfurt press conference following the decision. ``Upside risks to price stability have diminished, but they have not disappeared.''

The ECB will lower borrowing costs in December as financial turmoil increases growth risks, JPMorgan Chase & Co. and Goldman Sachs Group Inc. said two days ago, revising their forecasts.

JPMorgan's David Mackie, the chief European economist in London, previously forecast the ECB would start cutting in March and now predicts the benchmark rate will fall to 2.75 percent by the end of 2009. Goldman's Erik Nielsen, the chief European economist in London, who had expected the benchmark to stay at 4.25 percent through the middle of 2009, sees three quarter- point reductions by then.

Dollar's Gain

The dollar rose against all of the most-active currencies except the yen as demand for U.S. currency funding increased, reflecting banks' reluctance to lend.

The cost of borrowing in dollars in London for three months rose for a fourth day. The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points, or 0.06 percentage point, to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent.

``Looking at the euro against the dollar, it's like matching one dog against another dog,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``Who's got the most fleas? Dollar fundamentals don't seem to matter. It's extremely hard to fight this move into the dollar.''

Fed Rate Outlook

Futures on the Chicago Board of Trade showed a 34 percent chance that the Fed would cut its 2 percent target rate for overnight lending between banks by a half-percentage point on Oct. 29, with the balance of bets on a quarter-point reduction. Futures showed no chance of lower rates a month ago.

Treasuries rose, sending two-year note yields the furthest below 10-year yields since March, on speculation central banks will have to cut interest rates to prevent a global recession.

The U.S. Senate voted 74-25 in favor of legislation that links the rescue plan for financial companies to an increase in bank-deposit-insurance limits and tax breaks, after the House of Representatives rejected an earlier version of the bill. The House is likely to vote on the latest version tomorrow, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: October 2, 2008 12:28 EDT