Euro Is Near 2-Week Low as Traders Bet on ECB Interest Rate Cut

By Ron Harui and Stanley White

Dec. 4 (Bloomberg) -- The euro traded near a two-week low against the dollar and the yen on speculation the European Central Bank will cut interest rates by half a percentage point today, reducing the appeal of assets denominated in the currency.

The British pound was near the lowest in almost three weeks versus the greenback as economists forecast the Bank of England will lower borrowing costs by 1 percentage point. New Zealand’s central bank earlier reduced its benchmark rate by a record 1.5 percentage points to 5 percent and signaled more to come as it attempts to steer the economy out of recession.

“Selling the euro and the pound will remain in vogue for some time to come,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The ECB and the BOE are likely to cut rates into next year. This will increase downward pressure on their currencies.”

The euro traded at $1.2711 as of 12:48 p.m. in Tokyo from $1.2717 late in New York yesterday. It reached $1.2563 on Dec. 2, the lowest level since Nov. 21. The 15-nation currency was at 118.46 yen from 118.64 yen. The dollar traded at 93.19 yen from 93.30 yen.

The pound was at $1.4777 from $1.4784 yesterday, when it touched $1.4666, the weakest level since Nov. 17. South Korea’s won fell 0.3 percent to 15.81063 versus the yen.

The euro may drop to $1.2675 and the pound may slide to $1.4715 today, Soma said.

‘Euro Zone Recession’

The ECB will lower its benchmark rate to 2.75 percent from 3.25 percent today, according to a Bloomberg News survey of economists. European retail sales declined a larger-than- expected 2.1 percent in October, data showed yesterday, as widening financial turmoil took its toll on consumer confidence.

“Recent data suggests the euro zone recession may last longer than first anticipated and that adds to the case for the ECB to cut interest rates aggressively,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “For euro-dollar, this suggests a visit to the recent lows of between $1.23 and $1.24 is likely.”

An index based on a survey of about 700 U.K. service companies dropped to 40.1 for November, the lowest since the gauge began in 1996, Markit and the Chartered Institute of Purchasing and Supply said yesterday. Consumer confidence fell to the lowest level since at least 2004, Nationwide Building Society said.

Bank of England

The Bank of England will lower its main interest rate to 2 percent from 3 percent when it meets today, according to the median forecast of a separate Bloomberg survey.

The yen may rise against the euro on speculation the deepening global slowdown will spur investors to sell higher- yielding assets financed by borrowing in Japan.

Japanese businesses cut investment at the fastest pace in six years last quarter, a government report showed today.

“Investors will likely shun risk amid growing worries over a worldwide recession,” said Yuji Saito, Tokyo-based head of the foreign-exchange group at Societe General SA. “The yen may be bought.”

Capital spending excluding software fell 13.3 percent in the three months ended Sept. 30, a sixth quarterly decline, the Ministry of Finance said in Tokyo. Economists surveyed by Bloomberg News expected a 10.9 percent decline.

The yen’s 20 percent gain against the dollar and 38 percent advance versus the euro this year has increased the cost of Japanese exports. Panasonic Corp., the biggest maker of consumer electronics, said last week that gains in the currency would shave 22 billion yen ($236 million) from its profit this year.

Japan’s benchmark rate of 0.3 percent compares with 4.25 percent in Australia, 5 percent in New Zealand and 3.25 percent in the euro region.

Canadian Politics

Investors have been reducing carry trades, in which they get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Canada’s dollar may decline for a second day against its U.S. counterpart on speculation Prime Minister Stephen Harper will suspend Parliament to stave off defeat at the hands of a united opposition.

The leader of Canada’s Liberal Party, Stephane Dion, said yesterday that Harper’s reluctance to accept defeat in Parliament is threatening to undermine the economy. The main opposition Liberal Party agreed on Dec. 1 to form a coalition with the New Democratic Party that would be backed by the separatist Bloc Quebecois during key votes.

“The three opposition parties are saying Harper isn’t doing much during the current crisis and they are trying to force him out of power,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “There’s political uncertainty weighing on the Canadian dollar,” which may fall to C$1.2700 versus the greenback today, he said.

Canada’s dollar was at C$1.2542 versus the U.S. currency from C$1.2521 yesterday.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.netStanley White in Tokyo at swhite28@bloomberg.net;

Last Updated: December 3, 2008 23:30 EST