Euro Falls on Speculation ECB Will Cut Rates to Bolster Economy

By Stanley White

Nov. 6 (Bloomberg) -- The euro fell for a second day against the dollar on speculation the European Central Bank is in the midst of the most aggressive round of interest-rate cuts in its 10-year history.

The 15-nation currency also declined against the yen as economists forecast the ECB will lower its main refinancing rate by a half-percentage point to 3.25 percent today, after a similar-sized reduction less than a month ago, and signal further cuts. Britain's pound also weakened on speculation the Bank of England will reduce borrowing costs when it meets today.

``You can't buy the euro,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The ECB may cut rates well into next year, and that will cause the currency to fall.''

The euro declined 0.8 percent to $1.2851 at 12:16 p.m. in Tokyo from late yesterday in New York. It slumped to 125.74 yen from 126.89 yen. The dollar traded at 97.86 yen from 97.94. The pound fell 0.7 percent to $1.5799.

The Australian dollar slid to 67.14 U.S. cents from 68.13 cents and declined to 65.71 yen from 66.75 yen late yesterday in New York as the UBS Bloomberg Constant Maturity Commodity index of 26 raw materials fell the most since Oct. 22. Commodities account for 60 percent of Australia's exports.

Euro Downtrend

The ECB will announce its decision at 1:45 p.m. in Frankfurt today and the bank's president, Jean-Claude Trichet, will hold a press conference 45 minutes later. The ECB reduced the target to 3.75 percent from 4.25 percent on Oct. 8, joining the Federal Reserve, the Bank of England, the Bank of Canada and the Swiss National Bank in coordinated reductions.

``Look for the euro to remain in a broad downtrend,'' Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, the second-largest currency trader, wrote in a note yesterday. ``Our economists expect the ECB to cut half a percentage point and think the press conference could be more dovish than expected, leaving the door open for more rate cuts.''

Gains in the dollar may be limited before economic data tomorrow. U.S. payrolls fell by 200,000 last month and the unemployment rate rose to a five-year high of 6.3 percent, according to the median forecasts of economists surveyed by Bloomberg News.

U.S. stocks dropped yesterday on concern the world's largest economy will worsen even as President-elect Barack Obama plans a $175 billion ``middle-class rescue plan'' to stimulate growth. The Standard & Poor's 500 Index slumped 5.3 percent yesterday, the biggest drop following a presidential election, after data showed services shrank the most on record in October.

`Perfect Storm'

The yen and the dollar posted their largest monthly gains versus the euro in October since the latter's debut in 1999 as signs of a global recession led investors to seek safety in the Japanese and U.S. currencies.

``You had a perfect storm in October with bad earnings, fund managers needing to sell assets to meet redemptions, and people selling out of commodities and into dollars,'' said Amy Auster, head of foreign exchange and international economics research at Australia & New Zealand Banking Group Ltd. in Melbourne. ``A lot of those reasons to buy dollars have now come to an end.''

Futures on the Chicago Board of Trade showed a 92 percent chance yesterday that the Fed will cut the 1 percent target lending rate for overnight lending between banks by a half- percentage point at its Dec. 16 meeting, compared with zero odds a month ago.

Pound, Yen

The pound declined for a second day against the dollar and yen as traders bet that U.K. policy makers will lower their benchmark interest rate by three-quarters of a percentage point to 3.75 percent, according to a Credit Suisse Group AG index of probability based on overnight indexed swap rates. Fifteen of 60 economists in a Bloomberg survey say the Bank of England will reduce rates by that amount or more, with the rest predicting a half-point cut.

The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world's biggest foreign-exchange traders.

Deutsche Bank AG, UBS and Barclays Plc predict the yen will recover from its steepest weekly decline since 1999 as investors reduce carry trades that fund purchases of higher-yielding assets by borrowing in Japan. The currency will appreciate to 90 per dollar from 98.02 today in Tokyo even if the Bank of Japan intervenes to stem the biggest annual gain since 1998, they said.

``Once the market realizes that we're now in a global recession, there's further deleveraging to come,'' said Geoff Kendrick, a senior currency strategist at UBS in London. Traders ``are capitulating'' after five years of bets against the yen, he said in a Nov. 4 interview.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: November 5, 2008 22:29 EST