Euro, Pound Weaken on Speculation European Rates Will Decline

By Lukanyo Mnyanda and Stanley White

Jan. 26 (Bloomberg) -- The euro and the pound fell against the dollar on speculation the European and U.K. central banks will lower interest rates to combat a recession and bank losses.
The 16-nation euro also traded near a seven-year low versus yen before data that may show business sentiment in Germany slumped. Sterling approached a 23-year low versus the U.S. currency after U.K. home prices had the biggest annual decline since at least 2001.

“The European Central Bank will have to cut rates further than the market expects,” said Paul Robinson, a currency strategist in London at Barclays Capital. “Far too much bad news is priced in the pound.”
The euro fell to $1.2945 as of 9:47 a.m. in London from $1.2975 in New York on Jan. 23, when it slid to $1.2765, the lowest level in more than six weeks. The euro was at 115.23 yen from 115.12 yen and 113.75 earlier. The euro touched 112.15 yen on Jan. 21, the weakest since March 2002. The dollar bought 89.07 yen from 88.75 yen.

The pound dropped to $1.3737 from $1.3804. Sterling reached $1.3503 on Jan. 23, the lowest level since September 1985. The U.K. currency declined to 94.19 pence per euro from 94.02. It also fell to 122.18 yen from 122.42 yen after reaching a record low of 118.85 yen on Jan. 23. The pound may rebound to $1.41 and 92 pence versus the euro in a month, Robinson said.
U.K. Rates
U.K. policy member David Blanchflower said interest rates should be at zero to 0.25 percent to aid the economy, the Sunday Times reported yesterday. The central bank will cut its 1.5 percent main rate by a half-percentage point on Feb. 5, a Credit Suisse Group AG index of derivatives showed. The government’s plan for a second bank bailout in three months has stoked concern the financial crisis is deepening.
“Those that agree with Blanchflower should be bearish on the euro-pound, as we are,” Ashley Davies, a currency strategist in Singapore at UBS AG, the second-largest foreign- exchange trader, wrote in a research note today. “We continue to target euro-pound lower from current levels.”
The Ifo research institute in Munich may say its business climate index, based on a survey of 7,000 executives, dropped to 81 this month from 82.6 in December, according to a Bloomberg survey. The data will be released tomorrow.

‘Tough Time’ 

“European economies are having a tough time, and that will weigh on the euro,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “U.S. housing data may be an unsettling factor for currency markets and there are still concerns about the financial system, so there’s some bias for yen gains.”
The euro may decline to 113.50 yen today, he said. 

The National Association of Realtors may today say purchases of previously owned U.S. homes fell 2 percent in December to a record low annual pace of 4.4 million, according to a Bloomberg survey.
Federal Reserve policy makers will keep borrowing costs in a range from zero to 0.25 percent at a two-day meeting ending Jan. 28, according to a Bloomberg survey. The Fed may broaden the range of assets it will purchase to unclog credit markets.

The yen has risen against the 16 most-active currencies this year as more than $1 trillion in losses on mortgage-related securities at financial institutions worldwide prompted investors to sell higher-yielding assets and pay back low-cost yen loans.
Swiss Intervention
The Swiss franc weakened against the dollar on speculation the central bank will step into the foreign-exchange markets to limit its gains. It traded at 1.1625 per dollar from 1.1542, and 1.5003 versus the euro from 1.4962.
Credit Suisse still predicts the Swiss franc will climb 2.6 percent this quarter. BNP Paribas SA, the most accurate currency forecaster in a 2007 Bloomberg survey, and Royal Bank of Scotland say it will rise 4 percent by mid-year. That’s even after Swiss National Bank Vice President Philipp Hildebrand said last week that policy makers may sell “unlimited amounts of francs” to curb the gains.

“The SNB on its own can’t stop it if the market wants to push” the franc higher, said Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s largest currency trader. The central bank is probably sending “an early signal” and won’t intervene until the franc strengthens to about 1.40 per euro, he said. Gullberg predicts 1.4650 by mid-year.
The franc surged 6.1 percent against the dollar and 10.8 percent versus the euro in 2008 as investors sought refuge from the global financial crisis. Switzerland has a trade surplus and doesn’t have to increase debt sales as much as other nations with a deficit.

Zurich-based SNB hasn’t intervened in foreign-exchange markets to influence prices by purchasing or selling currencies since the mid-1990s.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
Last Updated: January 26, 2009 04:50 EST