Euro Falls as German Economy Enters Worst Recession in 12 Years

By Stanley White

Nov. 13 (Bloomberg) -- The euro fell to a two-week low against the dollar after Germany's economy entered its worst recession in at least 12 years, spurring speculation the European Central Bank will cut interest rates.

The 15-nation currency also pared gains against the yen after a German government report showed the biggest contraction over two consecutive quarters since 1996. The yen declined versus the Australian dollar, after yesterday surging the most in three weeks, as currency intervention by the Reserve Bank of Australia fueled speculation other central banks may follow suit.

``Economic data from Europe are weighing on the euro,'' said Tadahiko Nashimoto, director of foreign exchange at Barclays Bank Plc in Tokyo. ``There could be more demand to sell the currency as Europe-based traders enter the market.''

The euro fell to $1.2389, the lowest since Oct. 28, and traded at $1.2429 at 8:16 a.m. in London from $1.2505 late yesterday in New York. It traded at 119.14 yen, paring an earlier advance to 120.05 yen. The yen fell to 95.90 per dollar from 95.01.

Germany's gross domestic product contracted 0.5 percent in the third quarter after shrinking 0.4 percent in the previous three-month period, the Federal Statistics Office in Wiesbaden said today. A common definition of a recession is two consecutive quarters of a contraction in GDP.

Weaker Euro

Traders increased bets the ECB will reduce its 3.25 percent rate in the first quarter. The implied yield on Euribor futures contracts expiring in March fell to 2.70 percent from 3.15 percent at the end of last month. The ECB benchmark is 0.39 percentage point higher than the Euribor contract yield, compared with a 12-month average of 0.19 percentage point below the futures rate.

The Australian dollar climbed to 64.18 U.S. cents, recovering from an earlier low of 63.60 cents, after an RBA spokesman confirmed the central bank bought its own currency today.

The Aussie, as the currency is known, rose 0.9 percent from the New York close to 61.36 yen. The New Zealand dollar gained 0.3 percent to 53.48 yen. Central banks intervene in foreign exchange markets by arranging purchases and sales of currencies.

``The RBA's intervention is most likely designed to prevent hectic moves in the market,'' said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world's largest money manager for institutions. ``The initial reaction is that people will be reluctant to sell other currencies for yen.''

Aussie Slide

The Australian dollar has tumbled 36 percent versus the Japanese currency and 26 percent against the greenback in the past three months as the risk of a global recession prompted investors to cut purchases of higher-yielding overseas assets funded in Japan. Australia's benchmark rate is 5.25 percent, while Japan's is 0.3 percent and the U.S.'s is 1 percent.

The yen fell from a two-week high against the dollar on speculation other central banks will intervene in currency markets.

Abrupt currency moves are undesirable and a stronger yen hurts domestic stock investors, Japan's Finance Minister Shoichi Nakagawa told lawmakers today in Tokyo. He said last month Japan was prepared to intervene for the first time in four years.

The Bank of Japan, which trades on behalf of the Ministry of Finance, sold 14.8 trillion yen ($151 billion) in the first quarter of 2004, when the currency traded as high as 103.42 per dollar. The yen still ended the year stronger, at 102.63.

The intervention ``caused the yen to fall back against the dollar,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``When you see one central bank intervening, that sparks fear in the market that others could do so as well.''

Paulson Switch

The yen earlier rose to a two-week high against the euro after U.S. Treasury Secretary Henry Paulson's plan to divert bailout money from banks sparked a reduction in purchases of higher-yielding assets.

Paulson plans to use the second half of the $700 billion Troubled Asset Relief Program, known as TARP, to help relieve pressure on consumer credit, scrapping a proposal to buy devalued mortgage assets from banks. He said yesterday in Washington he is exploring a new ``facility'' to support asset- backed debt.

``The markets are probably ill at ease with the concept that TARP funds, which were targeted for financial-sector stabilization, are now getting pushed away from that purpose by the political process,'' said Robert Blake, a senior currency strategist in Boston at State Street Global Markets LLC, which has $15.3 trillion in assets under custody.

U.K. Rates

The British pound slumped after Bank of England Governor Mervyn King said the U.K. economy will shrink through most of next year and policy makers will cut interest rates further.

The currency declined to $1.4807, the lowest level since June 2002, before trading at $1.4891 from $1.4964 late yesterday in New York. It traded at 83.53 pence per euro, near a record low of 84.12 pence reached yesterday.

``Governor King was on the wires again this morning highlighting the downside domestic risks to growth,'' said Dustin Reid, senior foreign-exchange strategist at RBS Greenwich Capital Markets in Chicago. ``The fact that he continues to harp on it, and it's at such a senior level, probably has a lot of people concerned about sterling.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net