Euro Declines as ECB Revises Down 2009 Economic-Growth Forecast

By Kim-Mai Cutler and Ron Harui

March 5 (Bloomberg) -- The euro fell against the dollar after the European Central Bank reduced its economic growth forecasts, fueling speculation it will keep lowering interest rates following today’s half-point cut to an all-time low.

The euro also dropped versus the yen as the ECB cut its growth projections for the next two years. Central bank President Jean-Claude Trichet said today policy makers haven’t decided 1.5 percent is the lowest level for its main refinancing rate. The pound slid against the dollar after the Bank of England reduced its key rate to 0.5 percent and said it will buy assets as part of so-called quantitative easing. The yen rose versus the dollar, euro and Swiss franc.

“Trichet’s clearly dovish, that’s beyond any doubt,” said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. “We’re now seeing the re-pricing of the rate expectations and rate differentials to the U.S. is coming down. That is putting the euro under pressure.”
The euro declined to $1.2514 as of 2:39 p.m. in London, from $1.2661 in New York yesterday. The currency traded at 123.56 yen from 125.52. The yen strengthened to 98.68 per dollar, from 99.15 yesterday, after trading as weak as 99.68 earlier.

Today’s reduction brings the ECB’s target rate to the lowest level since the euro was introduced in 1999. All 55 economists surveyed by Bloomberg forecast the cut. Demand will stay “weak” through 2009, Trichet said in a statement today.
“We didn’t decide ex-ante that this was the lowest point that we could attain,” Trichet said during a press conference in Frankfurt “Further decisions will depend on the judgment of the governing council discussion.”

Growth Revisions 

The central bank expects the $1.2 trillion economy to contract between 3.2 percent and 2.2 percent this year after earlier forecasting a range of minus 1 percent to zero. Next year, the ECB said the range will be between a contraction of 0.7 percent and growth of the same margin.

“The euro’s under pressure and the main reason is the big cut in growth expectations,” said Robert Minikin, a London-based strategist for Standard Chartered Plc. “They are substantially below the previous forecasting round.”

Policy makers are reducing borrowing costs at a time when the world economy is shrinking and central banks around the world are cutting interest rates to near zero. Goldman Sachs Group Inc. revised its 2009 global economic-growth forecast today to minus 0.6 percent, from minus 0.2 percent.
When the ECB last cut its main refinancing rate by half a percentage point, on Jan. 15, the euro weakened as much as 0.4 percent against the dollar and 1 percent against the yen. The central bank left the rate unchanged at its most recent policy review on Feb. 5.

Bank of England

The Bank of England’s nine-member panel, led by Governor Mervyn King, cut the bank rate by a half point today, in line with the median of 60 economist forecasts in a Bloomberg survey. It will purchase 75 billion pounds ($106 billion) of assets to revive the economy by issuing “central bank reserves,” it said.
“In these highly uncertain times, there are merits to stimulating the economy through a variety of different channels,” King wrote in a letter to Chancellor of the Exchequer Alistair Darling dated Feb. 17 and published today.

The pound fell to $1.4108, from $1.4194 yesterday. It was at 88.56 pence per euro, from 89.21 pence.
The U.K. economy shrank 1.5 percent in the fourth quarter, the most since 1980, a government report showed Feb. 25. The central bank on Feb. 11 forecast it will contract at an annual 4 percent rate by the end of this quarter.

The Dollar Index, which tracks the U.S. currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, was at 89.059, from 88.577 yesterday, when it reached 89.624, the highest level since April 2006.

Yen Gains 

The yen rose against all 16 major currencies as stocks around the world declined, stoking demand for a refuge from the financial turmoil. The yen fell 8.2 percent versus the dollar this year and 2.4 percent against the euro.

“The recent bout of yen weakness has run its course,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London. “There’s just an increasingly bleak outlook and increased signs of financial distress. While the yen safe-haven trade is weakening, I don’t think you can justify the move from below 90 to 100 per dollar in the past few weeks. It’s just been too rapid.”

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: March 5, 2009 09:50 EST