Euro Trades Near 13-Month Low After ECB Rate Reduction Debated

By Daniel Kruger

Oct. 3 (Bloomberg) -- The euro may fall for a fifth straight day against the dollar on speculation European financial authorities may be slower than U.S. counterparts to react to the worldwide credit crunch.

Europe's currency fell to a 13-month low against the dollar after European Central Bank President Jean-Claude Trichet said yesterday policy makers discussed cutting the main refinancing rate before holding it at a seven-year high of 4.25 percent. The dollar may fall against the yen before a U.S. report forecast to show employers eliminated jobs in September for a ninth month.

``The market is starting to lose confidence in the Europeans' ability to deal with the credit crunch as it makes its way across the Atlantic,'' said Boris Schlossberg, director of currency research at GFT Forex in New York, in an interview on Bloomberg Television.

The euro traded at $1.3819 at 6 a.m. in Tokyo, after dropping 1.4 percent yesterday and touching $1.3748, the lowest level since September 2007. The euro was at 145.60 yen, following a 1.7 percent drop yesterday, when it reached 144.89, the lowest level since June 2006. The dollar traded at 105.36 yen, after dropping 0.3 percent.

Japan's yen rose against all of the most-active currencies yesterday as stocks in the U.S., U.K., Japan, Germany and Brazil plunged, encouraging investors to sell higher-yielding assets and pay back low-cost loans in Japan. The Standard & Poor's 500 Index dropped 4 percent on a U.S. economic outlook exacerbated by a Labor Department report showing the highest number of initial jobless claims in seven years.

Stronger Yen

The yen increased 5.8 percent to 52.10 against the Brazilian real and 3.8 percent to 12.36 versus the South African rand on speculation investors will reduce carry trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 13.75 percent in Brazil and 12 percent in South Africa.

The U.S. Senate voted 74-25 on Oct. 1 in favor of legislation that links a $700 billion rescue of the financial industry 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 today, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi.

Employers in the U.S. probably eliminated 105,000 jobs last month, 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. The unemployment rate held at a five-year high of 6.1 percent, according to economists.

U.S. Jobless Claims

Initial jobless claims increased to 497,000 in the week that ended Sept. 27, the highest since September 2001, the Labor Department said yesterday.

Europe's currency has slid 5.4 percent against the dollar this week, the biggest four-day drop since the euro started trading in 1999. The decline reduces the likelihood of coordinated action by central banks to support the dollar, which has dropped more than 15 percent against the 15-nation currency in the past five years.

The implied yield on the Euribor futures contract expiring in March fell to 4.18 percent yesterday, from 4.77 percent a month ago. The euribor contract has been an average of 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show.

``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 to hold borrowing costs steady.

Dollar Demand

The dollar rose against all of the most-active currencies except the yen yesterday as demand for U.S. currency funding increased, reflecting banks' reluctance to lend.

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans climbed 6 basis points to 4.21 percent yesterday, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to 5.32 percent.

Futures on the Chicago Board of Trade showed a 96 percent chance that the Fed would cut its 2 percent target rate for overnight lending between banks by a half-percentage point on Oct. 29, with the balance of bets on a quarter-point reduction. Futures showed no chance of lower rates a month ago.

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

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net