Euro Falls on Speculation Report Will Show Slowing Inflation

By Stanley White
Jan. 6 (Bloomberg) -- The euro fell against the yen and traded near a three-week low versus the dollar before European Union data that will probably show slowing inflation, giving the European Central Bank more room to lower interest rates.
The greenback advanced against 11 of the 16 most-active currencies on optimism U.S. President-elect Barack Obama will announce a stimulus package of about $775 billion. The yen rose against the dollar on speculation Japanese investors took advantage of its decline yesterday to buy the currency to repatriate overseas earnings.
“The market is leaning toward euro selling,” said Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking Co. in Tokyo. “There are growing signs the ECB will cut rates. Speculation Obama’s stimulus package will be large enough to help the U.S. economy is also supportive for the dollar.”
The euro fell to 126.64 yen at 11:33 a.m. in Tokyo from 127.31 yen late yesterday in New York. The euro traded at $1.3591 from $1.3635 yesterday, when it touched $1.3547, the lowest level since Dec. 15. The dollar was at 93.19 yen from 93.44 yen. It rose yesterday to 93.60 yen, the highest level since Dec. 8. The euro may decline to $1.3550 today, Iizuka said.
Inflation in the euro area probably slowed to 1.8 percent last month, according to the median forecast of 28 economists surveyed by Bloomberg News. The report from the European Union’s statistics office in Luxembourg is due today. The rate fell to 2.1 percent in November from 3.2 percent the prior month, the biggest reduction since at least 1991.
Further Rate Cuts
“Poor economic fundamentals in euroland warrant further rate cuts from the ECB,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The interest-rate differential is moving in favor of the dollar again.” The euro may fall to $1.30 in three months, said Upadhyaya.
The ECB cut interest rates by 1.75 percentage points since early October to 2.5 percent as the region entered a recession. The ECB’s next policy decision is due on Jan. 15.
Obama told House Speaker Nancy Pelosi yesterday that he favors a U.S. economic stimulus plan of about $775 billion, a Democratic aide said. The president-elect, who is due to deliver a speech on the economy on Jan. 8, met with congressional leaders from both parties at the Capitol to help win support for a two-year plan to tackle the nation’s recession.
Recovery In Sight
“I am very bullish on the dollar throughout 2009,” said Matt Esteve, foreign-exchange trader at currency-trading firm Tempus Consulting Inc. in Washington, in an interview on Bloomberg Television. “I think it’s because the U.S. economy is best set for recovery in 2009.”
The dollar will advance to $1.10 per euro and 110 yen by year-end, according to Esteve.
The yen advanced to 66.30 per Australian dollar from 66.97 late yesterday in New York. The yen pared yesterday’s 2.5 percent decline against the currency on speculation Japanese investors and exporters repatriated overseas earnings.
“When the yen comes back to Tokyo as cheaply as it did today, some Japanese investors can’t pass up the chance to buy it,” said Takeshi Tokita, vice president of foreign-exchange sales in Tokyo at Mizuho Corporate Bank, a unit of Japan’s second-largest publicly traded lender.
The yen may move between 92.60 and 93.40 versus the dollar today, he said.
Economic Data
Gains in the dollar versus the euro may be limited by speculation U.S. services activity shrank to the lowest level since records began in 1997.
The Tempe, Arizona-based ISM’s non-manufacturing index fell to 36.5 in December, according to a Bloomberg News survey of economists. A reading of less than 50 signals contraction. The data are due at 10 a.m. New York time today. Data due at the same time will show fewer Americans signed contracts to buy existing homes in November and factory orders fell for a fourth month, separate surveys indicate.
The Federal Reserve will also today publish minutes from its Dec. 16 policy meeting, at which the target rate for overnight lending between banks was cut to a range of zero to 0.25 percent for the first time.
“The markets need to be wary of a possible downside surprise to the ISM services data,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former Bank of Japan currency trader. “This is likely to weigh on the dollar.”
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net
Last Updated: January 5, 2009 22:08 EST