By Ron Harui and Stanley White
Nov. 17 (Bloomberg) -- The euro fell for a second day against the dollar on speculation that European central bankers will today signal further interest-rate reductions to counter a recession in the 15-nation region's economy.
The euro has weakened in each of the past two weeks and extended its decline today as traders raised bets the ECB will lower its 3.25 percent benchmark rate. The currency slid against the yen as the yield spread between two-year German and Japanese bonds narrowed to 1.67 percentage points last week, the least since 1990.
``The euro's weakness against the dollar is as clear as day,'' said Nobuaki Kubo, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of Brown Brothers Harriman. ``There are strong expectations for rates in Europe to fall. Euro selling against the dollar is likely to continue.''
The euro weakened to $1.2583 as of 7:50 a.m. in London from $1.2605 late in New York on Nov. 14. It declined to 122.18 yen from 122.39 yen. The yen traded at 97.07 per dollar from 97.14.
ECB members Gertrude Tumpel-Gugerell and Axel Weber speak at 9 a.m. and 9:50 a.m., respectively, in Frankfurt. Central banks around the world may lower rates as inflation slows amid a global recession, ECB President Jean-Claude Trichet said in Sao Paulo on Nov. 10.
The implied yield on Euribor futures contracts expiring in March fell to 2.795 percent today from 2.81 percent on Nov. 14, showing increased odds for an ECB rate cut.
ECB Versus Fed
The ECB's main refinancing rate of 3.25 percent compares with the Federal Reserve's benchmark rate of 1 percent. Futures on the Chicago Board of Trade show an 84 percent chance the Fed will halve its target for overnight bank loans from 1 percent at its next meeting on Dec. 16. The odds rose from 64 percent a week ago. The rest of the bets are for a quarter-point reduction.
The yen strengthened against the bulk of the world's 16 most-active currencies after the Group of 20 nations failed to agree on specific measures to combat a global financial crisis, prompting investors to sell higher-yielding assets funded in Japan. Appetite for so-called carry trades was also reduced as Japan's economy unexpectedly shrank in the third quarter, joining the U.S. and Europe in recession.
The G-20 urged a ``broader policy response'' and set a March deadline for recommendations on improving regulations at a summit that ended in Washington on Nov. 15. Leaders of G-20 countries met as a seizure in credit markets, stemming from losses of $964 billion on securities tied to home loans, threatened to trigger a global recession.
`Risk Aversion'
``Risk aversion may intensify if there is no more policy action after the G-20,'' said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, in a Bloomberg television interview. ``I would expect that the yen will strengthen across the board and the dollar-yen will head lower to as low as 90 yen.''
In carry trades, investors purchase higher-yielding assets funded with currencies borrowed at lower rates. The yen rose 2 percent against the euro last week, 5.1 percent against the Australian dollar and 8.1 percent versus the New Zealand dollar.
Benchmark interest rates are 0.3 percent in Japan, 5.25 percent in Australia and 6.5 percent in New Zealand.
The Japanese government today reported that gross domestic product fell at an annualized 0.4 percent pace in the three months ended Sept. 30, after sliding a revised 3.7 percent in the previous period. Economists predicted 0.1 percent growth, a Bloomberg survey showed.
`Weak Economy'
``The implications of the data are positive for the yen,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``A weak economy will feed into risk aversion and this will strengthen the yen.''
Japan's currency may rise to 92 per dollar by year-end, he said. Volatility implied on one-month dollar-yen options climbed to 27.55 percent from 26.63 percent late in New York on Nov. 14, indicating greater exchange-rate fluctuation risks that may erode profit on carry trades and hurt corporate earnings.
Canon Inc., the world's largest camera maker, will move its inkjet printer assembly operations from Japan to Thailand in 2010 because the strong yen is hurting profits, the Nikkei English News reported today, without saying where it got the information.
iPod, Big Mac
Australia's dollar, the worst-performing currency since the end of June, may rebound if prices of iPod music players and Big Mac hamburgers are anything to go by.
Apple Inc.'s ``Classic'' iPod costs $249 in the U.S. and the equivalent of $220 in Australia, a gap that suggests the so- called Aussie will appreciate as much as 24 percent to 80 U.S. cents by May, according to Tsutomu Komiya, a money manager at Daiwa Asset Management Co. in Tokyo.
``The Australian dollar is too cheap,'' after weakening 32 percent against the U.S. dollar and 38 percent versus the yen this half, said Komiya, who accurately predicted the start of the currency's decline in July. Daiwa owns 3.8 percent of the country's debt, the most among reported holdings. ``The Australian financial system is still healthy. Of course they have problems, but it's better than Japan or the U.S.''
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
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