Euro Drops Against Dollar as ECB Says Economic Activity `Weak'

By Agnes Lovasz

Sept. 4 (Bloomberg) -- The euro fell against the dollar after European Central Bank President Jean-Claude Trichet said the region is undergoing an ``episode of weak activity,'' signaling policy makers aren't inclined to lift interest rates soon.

The European single currency dropped for a sixth day as Trichet said downside risks to growth prevail. The ECB kept its main rate at a seven-year high of 4.25 percent today. The central bank cut its own economic growth projection for 2008 and 2009, according to staff forecasts.

Trichet ``sounded a touch more dovish than many in the market expected, and that triggered some sell-offs,'' said Neil Jones, the head of European hedge-fund sales at Mizuho Capital Markets in London. ``People in the market expected a tough stance on inflation, but his emphasis on downside risks on the economy might have surprised some investors.''

The euro fell to $1.4476 at 2:47 p.m. in London, from $1.4498 yesterday. It was at 81.25 British pence per pound, from 81.60 pence. The European currency slipped to 156.41 Japanese yen, from 157.01. The dollar was at 108.04 yen, from 108.29.

The bank's rate decision was predicted by all but one of 53 analysts surveyed by Bloomberg. The euro recovered some of its losses after Trichet said the ECB's current stance on interest rates will help deliver price stability.

The Bank of England kept its target rate at 5 percent today, as predicted by all 61 economists surveyed by Bloomberg.

The euro has dropped 5.5 percent versus the dollar since Aug. 7, when Trichet said growth in the countries using the euro will be ``particularly weak'' through the third quarter.

Factory Orders

The ECB kept its key rate on hold that day to curb inflation running at the fastest pace in more than 16 years even amid signs of a deepening economic slowdown. Inflation eased to 3.8 percent last month from 4.1 percent in July, the European Union's statistics office said Aug. 29. The economy contracted by 0.2 percent in the second quarter, the office said yesterday.

German factory orders unexpectedly fell in July, extending their longest sequence of declines and increasing the likelihood that Europe's largest economy will enter a recession, a report showed today. Orders slid 1.7 percent from June, the Economy Ministry in Berlin said. The median of 35 forecasts in a Bloomberg News survey was for a gain of 0.3 percent.

The ECB today lowered its 2008 economic growth forecast to about 1.4 percent from 1.8 percent, and its 2009 prediction to 1.2 percent from 1.5 percent. It raised the inflation forecast for this year and next to about 3.5 percent and 2.6 percent from 3.4 percent and 2.4 percent, respectively.

Forecast Cut

The bank's forecasts for growth and inflation are staff projections and are published as a range around a mid-point.

``Trichet has been talking about the weakening growth picture,'' said Ian Stannard, a London-based currency strategist for BNP Paribas SA. ``The euro is coming under pressure on the back of the deteriorating growth picture.''

The euro may approach the seven-month low of $1.4385 reached yesterday, Stannard said.

``We're looking at upticks in the euro as a chance to sell,'' Mike Moran, a senior currency strategist at Standard Chartered Plc in New York, said in an interview with Bloomberg Television. ``The rest of the world is catching up with a U.S. slowdown.''

The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, was at 78.093. It touched 78.310 this week, the highest level since October, on speculation a decline in oil prices will support economic growth in the world's largest energy consumer.

Payrolls Report

Gains in the dollar may be limited by speculation a deteriorating labor market will restrain consumer spending.

Companies in the U.S. cut an estimated 33,000 jobs in August, a private report based on payroll data showed today. The decrease followed a revised gain of 1,000 for the prior month that was lower than previously estimated, ADP Employer Services said.

U.S. nonfarm payrolls fell by 75,000 jobs in August, more than the previous month's decline of 51,000, according to a Bloomberg survey before the Labor Department report due tomorrow.

Business across most of the U.S. was ``slow'' last month, the Federal Reserve said yesterday in its regional economic survey, known as the Beige Book.

The South Korean won climbed the most of any currency in the world, rising to 1,129.02 per dollar from 1,148.60 yesterday, when it touched a four-year low of 1,159.05. South Korea doesn't face a crisis similar to the 1997 meltdown, Finance Minister Kang Man Soo said yesterday on KBS TV in Seoul. The won is Asia's worst- performing currency this year.

Technical analysis shows the euro may fall to $1.4360 in the next few days, said Masashi Hashimoto, a currency analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed bank.

The common European currency is poised to decline as its average price over the past 200 days is starting to fall, he said. First support at $1.4360 is a 38.2 percent retracement of the euro's rise from its low of $1.1640 on Nov. 15, 2005, to its record high of $1.6038 reached on July 15, according to a series of numbers known as the Fibonacci sequence.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net