Euro, Pound Extend Losses After Europe Central Banks Cut Rates

By Stanley White

Nov. 7 (Bloomberg) -- The euro and the pound declined for a third day after central banks in Europe and the U.K. reduced borrowing costs to counter the worst financial crisis in almost a century.

The 15-nation euro headed for a weekly decline after European Central Bank President Jean-Claude Trichet said policy makers may lower rates further after cutting the main refinancing rate by a half-percentage point yesterday to 3.25 percent. The pound also headed for a weekly decline after the Bank of England slashed its benchmark rate by 1.5 percentage points to 3 percent, the biggest cut since 1992.

``These rate cuts highlight how serious the problems are that Europe and the U.K. are facing,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed bank. ``The trend for the euro is to go lower. It may be some time before we see the pound form a bottom.''

The euro fell to $1.2687 as of 9:21 a.m. in Tokyo from $1.2715 late yesterday in New York. It slid to 123.67 yen from 124.29 yen. The pound declined to $1.5579 from $1.5627. The euro may fall to $1.25 and sterling may drop to $1.5280 in coming days, Shimizu said.

The dollar weakened to 97.46 yen from 97.75 yen before a government report today that may show U.S. payrolls shrank for a 10th straight month.

The euro headed for a 0.3 percent decline against the dollar and a 1.3 percent drop versus the yen this week. The pound slid by 3.1 percent against the dollar. The greenback declined by 1 percent versus the yen.

Trichet on `Turmoil'

The ECB's rate-setting Governing Council discussed a reduction of 0.75 percentage point to support Europe's economy, Trichet said yesterday at a press conference in Frankfurt after policy makers met.

``The intensification and broadening of the financial turmoil is likely to damp global and euro-area demand for a rather protracted period of time,'' he said. ``In such an environment, price, cost and wage pressures should also moderate.''

Economists predict the ECB will lower borrowing costs at the most aggressive pace in its 10-year history, reducing its target rate to 2.5 percent by April as growth falters. Target rates are 1 percent in the U.S. and 0.3 percent in Japan.

Euro Weakness

Manufacturing orders in Germany, the euro region's biggest economy, dropped by a record 8 percent in September, a government report showed yesterday. The European Commission said on Nov. 3 that the region may be in a recession and the economy is likely to stagnate next year.

``Euro weakness is likely to continue on the basis of interest rates,'' Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``We expect the ECB to lower rates to 1.75 percent by the second quarter of next year.''

All Group of Seven economies except Canada will contract next year, the International Monetary Fund said yesterday in an update to its World Economic Outlook report.

The Bank of England reduced its main rate by the most in 16 years yesterday as the seizure in credit markets left Britain on the edge of its first recession since 1991. Signs the economy is faltering prompted a 50 billion pound ($77.8 billion) bank rescue package from the government.

`Limit the Damage'

``The Bank of England's move triggered expectations the ECB would also be aggressive, and when the cut came, it was seen as not being enough,'' said Audrey Childe-Freeman, a senior currency analyst at Brown Brothers Harriman & Co. in London. Allowing more reductions ``may limit the damage to the euro.''

U.S. payrolls fell by 200,000 last month, and the unemployment rate rose to a five-year high of 6.3 percent, according to the median forecast of economists surveyed by Bloomberg News. The report from the Labor Department is due at 8:30 a.m. in Washington. The economy contracted 0.3 percent in the third quarter, the biggest decline since 2001.

``Sentiment is already pretty grim as far as the labor market is concerned,'' said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration. ``It will take a huge surprise on the upside to provide some support for U.S. dollar sentiment.''

Strong Yen

Japan will benefit from a strong yen because it will hold down prices for raw materials, said Eisuke Sakakibara, formerly Japan's top currency official.

``I still believe a strong yen is in the national interest of Japan, particularly in this situation when raw material prices will increase,'' Sakakibara said in an interview with Bloomberg Television in Singapore yesterday. The yen may rise to as high as 80 per dollar as so-called carry trades unwind, said Sakakibara, who was dubbed ``Mr. Yen'' during his 1997-1999 tenure at the Finance Ministry because of his influence over currency markets.

The yen's 15 percent gain against the dollar this year and 32 percent advance versus the euro prompted Japan's government to announce last month it may buy or sell currencies to influence exchange rates

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