Euro Falls on Speculation Trichet to Signal Further Rate Cuts

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By Ron Harui and Theresa Barraclough

March 5 (Bloomberg) -- The euro fell, snapping two days of gains versus the yen, on speculation the European Central Bank will cut interest rates today and signal further reductions in borrowing costs to counter the region’s deepening recession.

The euro also headed for a fourth weekly loss versus the dollar before a statistics office report that economists say will reiterate Europe’s economy shrank the most in at least 13 years last quarter. The yen traded near the weakest in four months against the greenback after government data showed Japanese companies slashed spending at the fastest pace in a decade. Global central banks are facing “extraordinary” challenges, ECB President Jean-Claude Trichet said this week.
“Trichet’s remarks will be very important as he may say he’ll cut rates again in the future,” said Michiyoshi Kato, senior vice president of foreign-currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest bank by assets. “This would likely cause selling of the euro.” 

The euro declined to $1.2614 as of 12:54 p.m. in Tokyo from $1.2661 late in New York yesterday. It dropped to 125.20 yen from 125.52. The yen traded at 99.25 versus the greenback from 99.15 yesterday when it touched 99.49, the weakest level since Nov. 10.

The dollar rose to $1.4151 per pound, from $1.4194 yesterday, before the Bank of England meets on monetary policy today. The U.S. currency advanced to 1.1720 Swiss francs from 1.1676, and climbed to C$1.2776 from C$1.2731.

Asian Stocks Gain 

The yen declined versus 11 of 16 major currencies as Asian stocks rose, encouraging investors to seek higher-yielding assets. The Nikkei 225 Stock Average added 2.4 percent and the MSCI Asia Pacific Index of regional shares gained 1.4 percent.

The ECB will cut its 2 percent target lending rate by half a percentage point to the lowest level since the European currency was introduced in 1999, according to a Bloomberg News survey of economists.
The ECB left borrowing costs unchanged at its most recent policy review on Feb. 5. The euro weakened as much as 0.4 percent against the dollar and 1 percent against the yen when the ECB cut rates by half a percentage point on Jan. 15.

The yen may fall for a third day versus the dollar after the Ministry of Finance said spending by Japanese businesses on capital equipment excluding software slid 18.1 percent in the fourth quarter, the steepest drop since the three months ended Dec. 31. 1998.

High Sensitivity 

“Recently the sensitivity is high to bad data so the yen will be under pressure and the risk is for the downside,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. “The yen bear trend will continue” and the currency may test 100 per dollar today, he said.

Japan’s currency fell 7.9 percent versus the dollar in February, the biggest monthly decline since August 1995, after reports showed the economy shrank last quarter by the most since 1974 and the trade deficit increased in January to the widest since at least 1980.

The pound declined on speculation the Bank of England will cut its benchmark rate to almost zero and begin to create money and inject it into the economy by buying assets.

The U.K. currency is poised for a second weekly loss on signs the nation’s recession is worsening. The 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 the economy will contract at an annual 4 percent rate by the end of this quarter.
Policy makers will halve the U.K.’s main rate to 0.5 percent, according to a Bloomberg survey of economists.

‘Clear Signals’ 

“We’ve got clear signals that the BOE is limbering up for quantitative easing,” analysts led by Callum Henderson, Singapore-based head of currency strategy at Standard Chartered Bank, wrote in a research note today. “We expect the BOE will cut rates to 0.5 percent and maintain them at these levels for the next year. Narrowing interest-rate differentials should be seen as further negatives for the pound.” 

Gains in the dollar may be tempered after Premier Wen Jiabao said today China will “significantly increase” investment to tackle the impact of the global economic slowdown, damping demand for the safety of the greenback.

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, may decline for a third day after Wen said China’s public spending will more than double this year to 908 billion yuan ($133 billion). In his report to the National People’s Congress in Beijing, equivalent of a U.S. State of the Union speech, Wen also reiterated an 8 percent growth target for this year.

‘Determined’

“This shows that they are quite determined to make sure the economy continues to grow and is positive for risk-taking appetite,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This may be negative for the dollar and the yen as haven currencies.”

The Dollar Index, which the ICE uses to track the U.S. currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, traded at 88.722 from 88.577 yesterday when it reached 89.624, the highest level since April 2006.

To contact the reporters on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.