Euro Slumps to Five-Month Low on Reduced Bets for Higher Rates

By Stanley White and Kosuke Goto

Aug. 8 (Bloomberg) -- The euro slumped to a five-month low against the dollar as traders pared bets that the European Central Bank will raise interest rates as the economy slows.

The euro also fell to a three-week low versus Japan's currency after ECB President Jean-Claude Trichet said economic growth will be ``particularly weak'' through the third quarter. The dollar headed for its biggest weekly gain against the yen in almost two months as oil dropped 19 percent from a record. The New Zealand and Australian dollars led losses among the most- traded currencies on speculation central banks will cut rates.

``Trichet triggered the euro's decline when he went out of his way to highlight weakness in the economy,'' said Saburo Matsumoto, senior manager of foreign-exchange sales at Sumitomo Trust & Banking Co. in Tokyo. ``A rate increase is off the cards for the time being, and the euro is likely to adjust lower.''

The euro fell 1.1 percent to $1.5163, the lowest since March 5, before trading at $1.5166 as of 8:18 a.m. in London, from $1.5325 late yesterday in New York. It's set for a fourth weekly decline, the worst losing streak since May 2007. The euro weakened to 166.74 yen from 167.70 yesterday and 167.55 at the end of last week. It reached 166.55 yen, the lowest since July 17.

The euro may fall to $1.50 in the next few weeks, Matsumoto forecast.

The dollar climbed to 109.94 yen, the highest since Jan. 10, from 109.44 late yesterday, and is up 2.1 percent from the end of last week.

Singapore Dollar

Singapore's dollar declined the most in two years, contributing to the biggest weekly drop since May 2004, on concern that a slowing economy will prompt the central bank to favor a weaker currency.

The local dollar slid 1.2 percent to S$1.4005, leading losses among Asian currencies.

The New Zealand dollar slumped 2.3 percent to 70.18 U.S. cents, the biggest loss in two months and the most among the 16 most-traded currencies, as investors added to bets the central bank will cut its 8 percent benchmark rate next month. Australia's dollar dropped 2 percent, declining for a ninth day, its longest losing streak since 1980, to 89.31 U.S. cents from 90.66 cents late in New York.

The Reserve Bank of Australia said it may lower borrowing costs, after keeping its benchmark interest rate at a 12-year high of 7.25 percent this week.

`No Bias'

Trichet said yesterday he has ``no bias'' or ``pre- commitment'' toward future rate movements after the central bank left the main refinancing rate at 4.25 percent. He told reporters at a press conference in Frankfurt that while inflation remains a threat, risks to economic growth are ``materializing.''

European retail sales dropped by the most in at least 13 years in June, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the European Commission said July 30.

``We do not expect a significant recovery in the euro from current levels,'' Ashley Davies, currency strategist in Singapore at UBS AG, the world's second-largest foreign-exchange trader, wrote in a research note today. ``Trichet delivered fairly standard comments, which were interpreted in a dovish fashion.''

Traders pared bets the ECB will raise the main refinancing rate for a second time this year. The three-month Euribor contract for December yielded 4.95 percent yesterday, down from 5.03 percent on Aug. 6.

Yield Spread

Two-year German bunds rose, pushing the yield down to 4.05 percent, a difference with similar-maturity U.S. Treasury notes of 1.61 percentage points compared with 1.92 points a month ago.

The euro may fall to $1.5170 against the dollar should it stay below technical support around $1.5227, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The so-called support level of $1.5227 represents its 200- day moving average, Hashimoto said. The next target of $1.5170 represents a 50 percent retracement from the euro's record high of $1.6038 on July 15, based on a series of numbers known as the Fibonacci sequence.

The dollar rose to a seven-month high against the yen as oil prices declined during the past week to trade at $119.11 a barrel, on course for a 4.8 percent loss this week and compared with the record $147.27 set on July 11.

``Oil prices have turned out to be much more supportive of the dollar than I expected,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It does temporarily relieve some concern that the U.S. economy will weaken further. This is a plus for sentiment.''

U.K. Rates

The pound fell 2.3 percent from a week ago to $1.9294 after the Bank of England yesterday kept borrowing costs unchanged for a fourth month at 5 percent. The decision was predicted by all 60 economists in a Bloomberg News survey. The Swiss franc dropped 1.1 percent to 1.0746, the lowest since February.

Losses in the yen against the dollar may accelerate on speculation a slowing economy will prevent the Bank of Japan from raising interest rates from 0.5 percent, the lowest among industrialized economies.

There is ``a high possibility'' the economy has entered a recession, Shigeru Sugihara, head of business statistics at the Cabinet Office in Tokyo, said on Aug. 6. Gross domestic product shrank an annualized 2.3 percent in the three months ended June 30, according to the median estimate of economists surveyed by Bloomberg. The report is due on Aug. 13.

``Officials confirmed Japan may have entered a recession,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``This is a catalyst for Japan selling, such as Japanese stocks and the yen. With interest rates low, Japanese investors will keep sending money abroad.''

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