By Anchalee Worrachate and Ron Harui 
Jan. 12 (Bloomberg) -- The euro fell against the dollar as traders increased bets the European Central Bank will cut its main interest rate this week and the International Monetary Fund said Europe is “underestimating” the need for fiscal stimulus.
The currency also slid to a one-month low versus the yen on speculation the ECB will cut rates to the lowest level since 2005 when policy makers meet on Jan. 15 to help pull the 16- nation economy out of a recession. The yen rose against all 16 major currencies tracked by Bloomberg as Asian and European shares and U.S. stock futures fell.
“The way to play it in the near term is to short the euro going into the announcement because the likelihood is that the ECB is going to cut,” said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “My preference is short the euro against the yen. Economic reports throughout the week are likely to add to the environment of high risk aversion.” A short position is a bet an asset will decline.
The euro dropped to $1.3437 as of 7:36 a.m. in New York, from $1.3476 on Jan. 9. The currency declined to 120.69 yen from 121.81 and traded as low as 120.11, the weakest since Dec. 12. Against the British pound, the euro rose to 89.51 pence from 88.78 pence. The yen strengthened to 89.82 per dollar, from 90.39 last week.
The yen also climbed to 61.45 versus Australia’s dollar from 63.59 and to 52.79 versus New Zealand’s dollar from 53.49 as investors reduced higher-yielding assets funded in Japan.
Ruble’s Tumble
Russia’s ruble slid to the weakest level in almost six years against the dollar after the central bank devalued the currency for a second day as declining oil prices threaten to deepen the country’s economic crisis. The ruble fell 1.7 percent to 31.0533 per dollar from 30.5312 yesterday, extending its decline to 24 percent since August.
Economists expect a half-percentage-point cut by the ECB to 2 percent this week, according to the median estimate in a Bloomberg News survey, after the economic slump deepened.
The IMF’s Managing Director Dominique Strauss-Kahn said in a Jan. 9 interview that governments in Western Europe are “behind the curve” in implementing stimulus packages and are “underestimating the needs.” He said the full impact of the slump hasn’t hit the region, where “shops are still full.”
“We find it hard to imagine that the ECB would decide not to cut rates given the weight of available information that has come to light in the last month,” said James Nixon, an economist at Societe Generale SA and former forecaster at the ECB. “It’s clear that demand and, consequently, activity is falling precipitously.” The ECB will cut its benchmark rate to as low as 1.5 percent this year, Nixon said.
ECB Action
The yield advantage for two-year German government notes over those of Japan narrowed to 1.13 percentage points, the least in 18 years, according to data compiled by Bloomberg.
The euro will have a “short-lived bounce” should the ECB not cut rates this week as the shrinking global economy will keep fueling dollar-demand, according to Merrill Lynch & Co.
“The supply of dollars into the foreign-exchange market is shrinking fast via a rapid contraction in the U.S. external deficit,” Steven Pearson, a strategist at Merrill Lynch in London, wrote in a research report today. “We expect the challenging economic and financial environment to continue to foster safe-haven demand for the dollar.”
The euro slid for a sixth day against the yen as futures traders bet the ECB will cut its 2.5 percent benchmark interest rate by as much as 0.75 percentage point on Jan. 15. The implied yield on the Eonia forward contract fell to 1.748 percent on Jan. 9 from 1.813 percent on Jan. 8. Eonia is the euro overnight index average.
‘Soft’ Data
The euro may weaken to $1.30 to the dollar and 117 yen by the end of first quarter, according to Calyon. The European common currency lost 5.3 percent against the yen, 4.4 percent against the dollar and 6.4 percent against the British pound this year.
“The recent run of soft euro-zone data has heightened expectations that the ECB will cut,” Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a research note today. “Concern about the euro-zone outlook will likely keep the euro-dollar defensive early this week.”
Strauss-Kahn said there will be “some decrease” in the fund’s economic forecasts. In November, the IMF predicted global growth of 2.2 percent this year, with U.S. gross domestic product shrinking by 0.7 percent, Japan’s by 0.2 percent and the euro area’s by 0.5 percent.
Inflation Report
A report this week will show the inflation rate in the euro region fell in December to 1.6 percent from 2.1 percent in the prior month, according to a median economists’ forecast in a Bloomberg News survey. The data will be published on Jan. 15, the same day as the ECB’s rate decision.
The ECB cut its main refinancing rate by 1.75 percentage points in the fourth quarter, while the Federal Reserve reduced its benchmark rate by 2 percentage points to as low as zero in the same period.
The world’s biggest foreign-exchange traders are snapping up Sweden’s krona and Norway’s krone.
Current-account surpluses and forecasts by the Organization for Economic Co-operation and Development that Nordic economies will avoid the worst of the global recession made the currencies Goldman Sachs Group Inc.’s top picks for 2009, with potential gains of more than 17 percent.
Deutsche Bank, the biggest trader in the $3.2 trillion-a- day foreign-exchange market, said last week the krona and krone are “well placed” for a rebound.
Excessively Weakened
“It’s pretty clear the Scandinavian currencies weakened excessively last year,” said Thomas Stolper, a currency analyst at Goldman Sachs in London. “These economies should hold up better than euroland and with improvements in market conditions some of this misalignment will be reversed.”
Sweden’s krona declined to 7.9790 per dollar from 7.9232 on Jan. 9, while Norway’s krone fell to 7.0327 from 6.9908.
Any losses in the dollar may be limited as U.S. President- elect Barack Obama is making “significant” changes to his two- year stimulus program of about $775 billion, after members of his own party called elements of the plan inadequate, according to lawmakers.
“He’s clearly setting up expectations for quite a significant response,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We may see the dollar recover further ground over the course of this week.”
The dollar may rise to $1.3300 per euro this week, Morriss said.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: January 12, 2009 07:40 EST
The currency also slid to a one-month low versus the yen on speculation the ECB will cut rates to the lowest level since 2005 when policy makers meet on Jan. 15 to help pull the 16- nation economy out of a recession. The yen rose against all 16 major currencies tracked by Bloomberg as Asian and European shares and U.S. stock futures fell.
“The way to play it in the near term is to short the euro going into the announcement because the likelihood is that the ECB is going to cut,” said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “My preference is short the euro against the yen. Economic reports throughout the week are likely to add to the environment of high risk aversion.” A short position is a bet an asset will decline.
The euro dropped to $1.3437 as of 7:36 a.m. in New York, from $1.3476 on Jan. 9. The currency declined to 120.69 yen from 121.81 and traded as low as 120.11, the weakest since Dec. 12. Against the British pound, the euro rose to 89.51 pence from 88.78 pence. The yen strengthened to 89.82 per dollar, from 90.39 last week.
The yen also climbed to 61.45 versus Australia’s dollar from 63.59 and to 52.79 versus New Zealand’s dollar from 53.49 as investors reduced higher-yielding assets funded in Japan.
Ruble’s Tumble
Russia’s ruble slid to the weakest level in almost six years against the dollar after the central bank devalued the currency for a second day as declining oil prices threaten to deepen the country’s economic crisis. The ruble fell 1.7 percent to 31.0533 per dollar from 30.5312 yesterday, extending its decline to 24 percent since August.
Economists expect a half-percentage-point cut by the ECB to 2 percent this week, according to the median estimate in a Bloomberg News survey, after the economic slump deepened.
The IMF’s Managing Director Dominique Strauss-Kahn said in a Jan. 9 interview that governments in Western Europe are “behind the curve” in implementing stimulus packages and are “underestimating the needs.” He said the full impact of the slump hasn’t hit the region, where “shops are still full.”
“We find it hard to imagine that the ECB would decide not to cut rates given the weight of available information that has come to light in the last month,” said James Nixon, an economist at Societe Generale SA and former forecaster at the ECB. “It’s clear that demand and, consequently, activity is falling precipitously.” The ECB will cut its benchmark rate to as low as 1.5 percent this year, Nixon said.
ECB Action
The yield advantage for two-year German government notes over those of Japan narrowed to 1.13 percentage points, the least in 18 years, according to data compiled by Bloomberg.
The euro will have a “short-lived bounce” should the ECB not cut rates this week as the shrinking global economy will keep fueling dollar-demand, according to Merrill Lynch & Co.
“The supply of dollars into the foreign-exchange market is shrinking fast via a rapid contraction in the U.S. external deficit,” Steven Pearson, a strategist at Merrill Lynch in London, wrote in a research report today. “We expect the challenging economic and financial environment to continue to foster safe-haven demand for the dollar.”
The euro slid for a sixth day against the yen as futures traders bet the ECB will cut its 2.5 percent benchmark interest rate by as much as 0.75 percentage point on Jan. 15. The implied yield on the Eonia forward contract fell to 1.748 percent on Jan. 9 from 1.813 percent on Jan. 8. Eonia is the euro overnight index average.
‘Soft’ Data
The euro may weaken to $1.30 to the dollar and 117 yen by the end of first quarter, according to Calyon. The European common currency lost 5.3 percent against the yen, 4.4 percent against the dollar and 6.4 percent against the British pound this year.
“The recent run of soft euro-zone data has heightened expectations that the ECB will cut,” Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a research note today. “Concern about the euro-zone outlook will likely keep the euro-dollar defensive early this week.”
Strauss-Kahn said there will be “some decrease” in the fund’s economic forecasts. In November, the IMF predicted global growth of 2.2 percent this year, with U.S. gross domestic product shrinking by 0.7 percent, Japan’s by 0.2 percent and the euro area’s by 0.5 percent.
Inflation Report
A report this week will show the inflation rate in the euro region fell in December to 1.6 percent from 2.1 percent in the prior month, according to a median economists’ forecast in a Bloomberg News survey. The data will be published on Jan. 15, the same day as the ECB’s rate decision.
The ECB cut its main refinancing rate by 1.75 percentage points in the fourth quarter, while the Federal Reserve reduced its benchmark rate by 2 percentage points to as low as zero in the same period.
The world’s biggest foreign-exchange traders are snapping up Sweden’s krona and Norway’s krone.
Current-account surpluses and forecasts by the Organization for Economic Co-operation and Development that Nordic economies will avoid the worst of the global recession made the currencies Goldman Sachs Group Inc.’s top picks for 2009, with potential gains of more than 17 percent.
Deutsche Bank, the biggest trader in the $3.2 trillion-a- day foreign-exchange market, said last week the krona and krone are “well placed” for a rebound.
Excessively Weakened
“It’s pretty clear the Scandinavian currencies weakened excessively last year,” said Thomas Stolper, a currency analyst at Goldman Sachs in London. “These economies should hold up better than euroland and with improvements in market conditions some of this misalignment will be reversed.”
Sweden’s krona declined to 7.9790 per dollar from 7.9232 on Jan. 9, while Norway’s krone fell to 7.0327 from 6.9908.
Any losses in the dollar may be limited as U.S. President- elect Barack Obama is making “significant” changes to his two- year stimulus program of about $775 billion, after members of his own party called elements of the plan inadequate, according to lawmakers.
“He’s clearly setting up expectations for quite a significant response,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We may see the dollar recover further ground over the course of this week.”
The dollar may rise to $1.3300 per euro this week, Morriss said.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: January 12, 2009 07:40 EST
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