Euro Trades Near 8-Week Low Before European Inflation Report

By Ron Harui and Ye Xie

Feb. 3 (Bloomberg) -- The euro traded near an eight-week low against the dollar before a report that may show European producer prices fell for a fifth month, giving the region’s central bank more room to cut interest rates.

The pound may decline for a second day versus the dollar and the euro on concern a U.K. report will indicate construction, which accounts for 6 percent of the economy, shrank last month at the fastest pace in more than a decade. The yen traded close to a one-week high versus the dollar on speculation credit losses will widen after Standard & Poor’s cut the ratings on 737 classes of subprime mortgage bonds to D, its grade for default.

“European currencies such as the euro and the pound are likely to remain under downward pressure,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “There are still worries over their economies and the credit crisis in the U.S. The bias is also for the yen to strengthen.” 

The euro traded at $1.2865 as of 10:20 a.m. in Tokyo from $1.2843 late in New York yesterday, when it reached $1.2706, the lowest level since Dec. 5. The currency was at 115.16 yen from 114.89 yen. The dollar was little changed at 89.51 yen.

The pound declined to $1.4242 from $1.4264 in New York yesterday. Sterling weakened to 90.33 pence per euro from 90.03. Japan’s currency rose 0.4 percent to 6.182 versus Mexico’s peso and gained 0.3 percent to 15.58112 against South Korea’s won.

‘Sell the Euro’ 

Europe’s single currency may weaken for a fourth day against the yen as prices of goods leaving euro-area factories may have dropped 1.2 percent in December after a 1.9 percent decline in November, according to a Bloomberg News survey of economists. The European Union statistics office releases the report at 11 a.m. in Luxembourg today.

European Central Bank President Jean-Claude Trichet reiterated in an interview on Bloomberg Television at the World Economic Forum in Davos, Switzerland, last week that the central bank’s next important meeting is in March, signaling policy makers will keep the rate unchanged at 2 percent on Feb. 5.

“As most recent data releases confirmed a further weakening in growth conditions, and inflation fell at a faster pace than initially anticipated, the probability for a policy step this week has risen considerably,” analysts led by Zurich- based Mansoor Mohi-Uddin at UBS AG, the second-biggest currency trader last year, wrote in a research report yesterday. “We expect the euro to remain in a broad downtrend.” 

The pound fell versus 15 of the 16 most-active currencies as a U.K. index based on a survey of purchasing managers at building companies was probably 29 in January, the lowest since the survey began in April 1997, a separate Bloomberg survey showed. The Chartered Institute of Purchasing and Supply and Market releases the data at 9:30 a.m. in London today
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‘Strongest Currency’ 

The yen may advance on speculation investors will reduce so-called carry trades after Standard & Poor’s also lowered 1,078 classes of Alt-A mortgage-backed securities to D, according to a separate statement yesterday.

“The yen is the strongest currency out there,” said Tony Bedikian, senior vice president of global-markets trading at Union Bank of California in Los Angeles. “The market has stabilized to some extent, but the bleeding hasn’t stopped yet.” 

The world’s biggest financial companies incurred more than $1 trillion in writedowns and losses since 2007 after the subprime mortgage market collapsed.

Benchmark interest rates are 7.75 percent in Mexico, 4.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is that currency market moves erase those profits.
The Reserve Bank of Australia will probably reduce rates by 1 percentage point to 3.25 percent at a meeting today, a separate Bloomberg survey shows. Traders are betting on a 41 percent chance of a bigger cut, according to a Credit Suisse Group index based on swaps trading.


To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.
Last Updated: February 2, 2009 20:32 EST