Euro Falls to 1-Week Low After Trichet Says `No Bias' on Rates

By Stanley White and Kosuke Goto

July 4 (Bloomberg) -- The euro declined to a one-week low against the dollar after European Central Bank President Jean- Claude Trichet signaled he may stop lifting the benchmark interest rate again.

The 15-nation euro headed for a weekly decline against the dollar after Trichet said he has ``no bias'' or ``pre- commitment'' following the ECB's decision to raise its main refinancing rate by a quarter-percentage point to 4.25 percent. The Swedish krona traded near a one-week high against the euro after the Riksbank raised its benchmark interest rate to 4.5 percent and said it may increase borrowing costs again.

``The euro will face a little more selling pressure,'' said Akio Shimizu, chief manager of foreign exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly traded company. ``Trichet stuck to his message that he wouldn't raise rates successively. Traders will price expectations for additional rate hikes out of the euro.''

The euro touched a one-week low of $1.5675 and traded at $1.5706 at 9:50 a.m. in Tokyo, from $1.5703 yesterday. The euro has fallen 0.6 percent this week. The dollar was at 106.69 yen, unchanged from yesterday and up 0.5 percent from a week earlier. The euro bought 167.52 yen, little changed from last week.

Sweden's krona traded at 9.4176 per euro, near a one-week high of 9.3986, after the Riksbank said it may boost interest rates ``a couple'' more times this year to curb inflation.

The ECB's interest-rate increase will help the central bank bring the inflation rate back below 2 percent, Trichet said at a press conference in Frankfurt yesterday. Economic growth may weaken to 1.5 percent next year from 1.8 percent this year and 2.6 percent in 2007, according to ECB staff.

`To the Sidelines'

``The ECB is moving to the sidelines,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``It does not mark a sharp turnaround for the euro-dollar. But it took some steam out of the euro's rally.''

Traders reduced bets the ECB will increase rates further this year. The implied rate on the December Euribor futures contract fell 0.13 percentage point to 5.15 percent yesterday.

The yield advantage of two-year German bunds over comparable-maturity Treasury notes decreased to 1.92 percentage points yesterday, making the European securities less attractive to investors. The difference was 2.05 percentage points on July 2, the widest since June 6.

Redemption

The euro also weakened on speculation investors will repatriate earnings from European government debt payments.

The euro-zone region will pay 43 billion euros ($67.4 billion) in coupon and principal on government debt today, including Finland's bond redemption totaling 7 billion euros, said Yuji Saito at Societe Generale SA in Tokyo.

``Euro bond redemption and coupon payments are weighing on the euro,'' said Saito, head of foreign-exchange sales at the Tokyo unit of France's second-largest by market value. ``More than a few investors are trying to repatriate redemption payments on euro-zone bonds this week, taking advantage any rally of the euro.''

U.S. Payrolls

Trichet's comments helped counter a Labor Department report showing U.S. employers eliminated jobs in June for a sixth consecutive month.

U.S. payrolls fell by 62,000 last month, following a revised decline of 62,000 in May, the Labor Department said yesterday in Washington. The median forecast of 81 economists surveyed by Bloomberg News was for a reduction of 60,000. The jobless rate remained at 5.5 percent after jumping in May by the most in two decades.

``Soft employment will have an impact on consumers,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``There's still a good chance we're going to test the old highs,'' he said of the euro.

Futures on the Chicago Board of Trade yesterday showed an 18 percent chance the Fed will increase its target rate for overnight lending between banks by a quarter-percentage point at its Aug. 5 meeting, compared with 25 percent odds on June 2.

The greenback dropped 1.2 percent against the euro last week in its second consecutive weekly loss after the Fed gave no indication in its June 25 statement that it will start reversing the most aggressive series of cuts in two decades.

Crude Oil

Declines in the euro may be limited by speculation its positive correlation with oil prices will lure investors into buying the currency.

Crude oil for August delivery touched $145.85 yesterday, the highest since trading began in 1983. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

``With oil continuing its way to $150 a barrel, it's hard for the euro to drop,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The outlook for the dollar is hardly bullish.''

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net Kosuke Goto in Tokyo at kgoto2@bloomberg.net