Euro Trades at Lowest Level Since October as ECB Cites Weakness

By Stanley White and Ye Xie

Sept. 5 (Bloomberg) -- The euro fell to the lowest level since October against the dollar after European Central Bank President Jean-Claude Trichet said that the region is in an ``episode of weak activity.''

The 15-nation euro also slumped to the lowest level versus the yen in a year as Luxembourg Finance Minister Jean-Claude Juncker said the currency is ``overvalued.'' The yen jumped to the highest in more than a month against the U.S. dollar and hit two-year highs against the Australian and New Zealand dollars on speculation a global slowdown and commodity declines will lead to a reduction in holdings of higher-yielding assets.

``The euro may fall further as Trichet's comments cause people to lower expectations for an interest-rate increase,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital Inc., a unit of Britain's third-biggest lender. ``The yen is also a beneficiary as falling commodities point to a global recession, and that's decreasing risk appetite.''

The euro fell to $1.4266 at 8:29 a.m. in Tokyo, from $1.4325 yesterday. It earlier touched $1.4214, the weakest since Oct. 24. The euro slid to 150.60 yen, the lowest since Aug. 17, 2007, before trading at 152.00 yen from 153.40 yen. The yen reached 105.69 per dollar, the highest since July 17, and traded at 106.57 from 107.08. The euro may decline to $1.40 in six months, Umemoto said.

Carry Trades

The Australian dollar dropped 3.7 percent to 87.04 yen from late Asian trading yesterday. It touched 85.88 yen, the lowest since July 2006. New Zealand's dollar slumped 4.3 percent to 71.02 yen, reaching 69.96, the lowest since July 2006. The UBS Bloomberg Constant Maturity Commodity Index reached a seven- month low and the Standard & Poor's 500 Index tumbled the most in three months.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to these trades is that currency moves may erase profits.

The yen was little changed after a government report showed capital spending by Japanese businesses unexpectedly fell in the three months ended June 30.

The euro dropped for a seventh day against the dollar, its longest decline since October 2006. The ECB kept its main refinancing rate at a seven-year high of 4.25 percent to curb inflation running at the fastest pace in more than 16 years even amid signs of a deepening economic slowdown. The ``upside risks to price stability prevail'' and growth risks are on the ``downside,'' Trichet said at a press conference.

`Effectively Overvalued'

Europe's currency extended its decline after Luxembourg Juncker told reporters the currency is ``effectively overvalued.'' The euro has dropped more than 10 percent against the dollar from the record high of $1.6038 set on July 15.

``Juncker's comments pushed the euro lower,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It's a bit of an overshoot. It reflected a market that really wants to buy dollars.''

The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose 0.2 percent to 78.795 after yesterday touching 79.077, the highest in almost a year.

U.S. payrolls probably shrank by 75,000 last month, following a drop of 51,000 in July, according to the median forecast of 76 economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington.

Sterling fell for a ninth day, reaching a two-year low of $1.7558 after the Bank of England yesterday kept its target lending rate at 5 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.

`Financial Tsunami'

The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' said Bill Gross, co-chief investment officer of Newport California-based Pacific Investment Management Co., manager of the world's biggest bond fund, on the firm's Web site yesterday.

``The market remains fearful of another `credit event,''' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Demand for safe-haven currencies should rise. Tightening credit standards force hedge funds out of these carry positions.''

The ECB lowered its 2008 economic growth forecast yesterday to about 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. The central bank raised its inflation forecast for this year to 3.5 percent from 3.4 percent and 2.6 percent from 2.4 percent for 2009.

``It's very tough for them to cut rates,'' said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs Group Inc. ``It's difficult for the dollar rally to have another leg.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net