Euro Falls to 13-Month Low Versus Dollar; ECB Debated Rate Cut

By Kim-Mai Cutler

Oct. 2 (Bloomberg) -- The euro fell to a 13-month low against the dollar and the weakest in two years versus the yen after European Central Bank President Jean-Claude Trichet said policy makers discussed cutting interest rates as economic growth slows.

The European single currency dropped for the fourth day against the dollar as Trichet said recent data suggests ``increased downside risks'' to growth. The ECB kept its main rate at 4.25 percent today, a seven-year high. The decision was predicted by all 58 economists surveyed by Bloomberg.

``The euro is under pressure across the board,'' said Marcus Hettinger, a Zurich-based currency strategist for Credit Suisse Group. ``The next move in rates will be down. It's more a question of time.''

The euro declined to $1.3828 at 3:23 p.m. in London, from $1.4009 yesterday in New York. It touched $1.3748, the weakest level since Sept. 7, 2007. The euro fell to 145.52 yen, from 148.11 yen, reaching 145.19, the lowest level since July 11, 2006. The U.S. currency traded at 105.25 yen, from 105.71 yen.

Declines in the euro reduce the likelihood of coordinated action by central banks to support the dollar, which has dropped more than 17 percent against the 15-nation currency in the past five years.

It may also help European exporters such as Fiat SpA, Volkswagen AG and Airbus SAS just as the region heads toward a recession. French Finance Minister Christine Lagarde said Sept. 11 she welcomed the euro's decline to below $1.40. Belgium's Didier Reynders said a weaker euro reflected ``fundamentals.''

`Downside Risks'

The euro has slid 5.6 percent this week, the biggest four-day drop since the currency's debut in 1999.

Traders raised bets on a rate cut in coming months. The implied yield on the Euribor futures contract expiring in March was at 4.16 percent today, from 4.77 percent a month ago.

``The economic outlook is subject to increasing downside risks,'' mainly ``stemming from ongoing financial-market tensions,'' Trichet said at a Frankfurt press conference following the decision. ``Upside risks to price stability have diminished, but they have not disappeared.''

Euro-region inflation was 3.6 percent last month, down from a 16-year high of 4 percent in July. The ECB's inflation target is below 2 percent.

``Trichet has downplayed the upside inflation risks for the first time in a long time,'' Dustin Reid, a senior currency strategist at ABN Amro Holding NV in Chicago, wrote in an e-mailed report. The fact the ECB discussed a rate-cut option today ``may give this move some further legs,'' he said, adding the euro may trade as low as $1.3600 in the coming week.

Dollar Strength

The dollar rose against 15 of the 16 most frequently traded currencies as demand for dollar funding increased amid the seizure in the money markets. The dollar also advanced after the Senate approved a $700 billion bank-rescue bill, bolstering expectations the U.S. will act faster than Europe to address the credit squeeze.

``Looking at the euro against the dollar, it's like matching one dog against another dog. Who's got the most fleas?'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``Dollar fundamentals don't seem to matter. It's extremely hard to fight this move into the dollar.''

European producer-price growth slowed in August from an 18- year high in the prior month as oil prices slid from a record, easing inflationary pressures, the European Union statistics office in Luxembourg said today. Crude declined by 33 percent since reaching an all-time high of $147.27 a barrel in July.

Rate Predictions

The ECB will lower borrowing costs in December as financial turmoil increases growth risks, JPMorgan Chase & Co. and Goldman Sachs Group Inc. said two days ago, revising their forecasts.

JPMorgan's David Mackie, the chief European economist in London, previously forecast the ECB would start cutting in March and now predicts the benchmark rate will fall to 2.75 percent by the end of 2009, compared with 3.5 percent before. Goldman's Erik Nielsen, the chief European economist in London, who had expected the benchmark to stay at 4.25 percent through the middle of 2009, sees three quarter-point reductions by then.

The financial crisis reached new heights in Europe this week as governments stepped in to help bail out five banks and credit costs soared to records.

Dexia SA, the world's biggest lender to local governments, received a 6.4 billion-euro state-backed rescue this week as the credit crisis spread to Europe. Governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium's largest financial-services firm, and Hypo Real Estate Holding AG received a loan guarantee from Germany.

Senate Vote

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling banks haven't started to lend. The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent.

The U.S. Senate voted 74-25 in favor of legislation that links the rescue plan for financial companies to an increase in bank-deposit-insurance limits and tax breaks, after the House of Representatives rejected an earlier version of the bill. The House is likely to vote on the latest version tomorrow, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi.

Europe has yet to follow the U.S. with any bailout proposals. France and Germany clashed over whether to create a fund to rescue beleaguered banks. Lagarde told the German newspaper Handelsblatt a package is needed to help ``smaller'' European states ``threatened with a banking failure.'' German finance ministry spokesman Torsten Albig told reporters in Berlin his government ``doesn't support the plan.''

``Europe hasn't yet taken steps in a unified manner,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank. ``Market consensus is that the U.S. bill will eventually pass in some kind of form. The package is likely to reduce worries over the U.S. and bolster the dollar.''

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net