Euro Falls to 20-Month Low Per Dollar on Bets ECB Will Cut Rate

By Stanley White and Candice Zachariahs
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Oct. 22 (Bloomberg) -- The euro fell to a 20-month low against the dollar on speculation the European Central Bank will cut interest rates to bolster growth as the global economy heads for recession.

The single European currency also slid to the weakest in four years versus the yen as Asian stocks declined, reducing demand for higher-yielding assets funded by loans in Japan. The British pound tumbled to a five-year low after Bank of England Governor Mervyn King said the country is likely in a recession. The Australian and New Zealand dollars dropped after prices of commodities the two countries export declined.

``It's easy to sell the euro,'' said Hiroshi Yoshida, a foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``The ECB has a lot of scope to lower rates. Market sentiment isn't in the euro's favor.''

The euro fell to $1.2956, the weakest level since February 2007, before trading at $1.2970 as of 12:15 p.m. in Tokyo from $1.3063 late yesterday in New York. It dropped to 130.07 yen, the lowest since April 2004, and last traded at 130.11. Japan's currency was at 100.32 per dollar from 100.14.

The pound dropped to $1.6487, the lowest since September 2003, and traded at $1.6509 from $1.6706. It also declined for a third day against the euro to 78.57 pence.

The Australian dollar weakened 2 percent to 67.77 U.S. cents. New Zealand's dollar declined to 60.51 cents from 61.45. The Aussie, as Australia's currency is known, pared declines after the government reported a 5 percent inflation rate for the third quarter, more than the 4.8 percent forecast by economists in a Bloomberg News survey.

Euribor Futures

Investors bet the ECB will lower borrowing costs by another 0.75 percentage point by June after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8, part of coordinated reductions by major central banks.

The implied yield on the three-month Euribor contract expiring in June fell to 3.23 percent yesterday, the lowest level since January 2006. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year.

``The economic fallout of the crisis will lead to more aggressive policy actions in major countries,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``The yen and the dollar will be the beneficiaries.''

Losses to Accelerate

The euro will depreciate to $1.26 in eight weeks, said Fitzpatrick. He's recommending clients buy the dollar and the yen ``pretty much against everything.''

The dollar has gained 23 percent since touching a record low of $1.6038 per euro on July 15 on speculation the U.S. currency will benefit as the European economy slows.

The British pound fell for a fourth day against the greenback after a report yesterday showed U.K. manufacturing confidence dropped to its weakest level in almost three decades.

``It now seems likely that the U.K. economy is entering a recession,'' BOE Governor King said in a speech to executives in Leeds, England yesterday. ``The balance of risks to inflation in the medium term shifted decisively to the downside.''

The pound may continue its slide ahead of the release of minutes from the central bank's last meeting due at 9:30 a.m. in London today. Citigroup Inc. and UBS AG predict the Bank of England will follow the Oct. 8 emergency rate cut to 4.5 percent with another half-point reduction when it meets Nov. 6. Barclays Capital forecast that the bank rate will fall to 3 percent by the fourth quarter of 2009.

Pound Indicators

The pound may weaken toward $1.60, wrote Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, citing weekly and monthly stochastic and trend strength indicators.

The Australian and New Zealand dollars fell after the UBS Bloomberg Constant Maturity Commodity Index yesterday declined toward its lowest level since January 2007 as prices of copper, gold and crude oil dropped. Raw materials account for 60 percent of Australia's exports and 70 percent of New Zealand's.

The kiwi, as New Zealand's currency is known, also fell as traders bet the country's central bank will lower interest rates by a record 1 percentage point from 7.5 percent tomorrow, according to a Credit Suisse index based on overnight swaps trading. Nine of 11 economists surveyed by Bloomberg News expect a cut to 6.5 percent, with two forecasting a reduction of 75 basis points.

New Zealand Rate

``The market is fully anticipating a 100 basis-point cut,'' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. ``It's going to be of secondary importance to the wider global themes of equity market sentiment, the flow and impact from the financial crisis to the real economy and the deleveraging process that we're seeing around the globe.''

The yen rose to a four-year high against the euro and traded near a one-week high versus the dollar on speculation a slowing global economy will prompt investors to pare holdings of higher- yielding assets funded with the Japanese currency.

The MSCI Asia-Pacific Index of regional shares lost 2.6 percent. Japan's Nikkei 225 Stock Average fell 2.9 percent after Nikkei English News reported that Mitsubishi UFJ Financial Group Inc. missed its profit forecast and Toyota Motor Corp. may record its first sales decline in a decade.

``Currency markets will take their cue from global equities,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``That should support the yen as sentiment may not be strong enough to take on risk.''

In carry trades, investors borrow in currencies with low interest rates and invest in nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net