Euro Falls as ECB Cuts Rate, Trichet Sees ‘Protracted’ Weakness

By Bo Nielsen

Dec. 4 (Bloomberg) -- The euro fell against the yen after European Central Bank President Jean-Claude Trichet said the 15- nation’s economy will keep shrinking next year as global turmoil in the credit markets persists.

The 15-nation currency also fell versus the Brazilian real as the Frankfurt-based ECB lowered its key interest rate by the most in its history to boost the recession-mired economy. “Global and euro-area demand are likely to be dampened for a protracted period of time,” Trichet said at a press conference in Brussels today. The ECB cut its key rate by three quarters of a percentage point to 2.5 percent.

“The bigger picture here is that we need sharply lower rates in the future, and that will mean even more cuts down the line,” said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc.

The euro dropped 0.5 percent to 118.02 yen at 10:55 a.m. in New York, from 118.64 yesterday. Europe’s currency traded at $1.2732, compared with $1.2717, after falling to $1.2550, the lowest level since Nov. 21. The dollar dropped 0.4 percent to 92.91 yen from 93.30 yen.

The cut in the main refinancing rate was the ECB’s second in a month. The reduction follows cuts in the U.K., Sweden and New Zealand today as central banks act to stem the global economic slowdown.

The single currency pared its declines as some analysts speculated lower borrowing costs will revive growth. The euro region’s gross domestic product shrank 0.2 percent in the third quarter from the previous three months, matching an initial estimate, the European Union’s Luxembourg-based statistics office said today.

‘Ahead of the Curve’

“In pretty much every instance this week, the central banks have delivered more than the market was thinking,” said Jim McCormick, head of foreign-exchange and local-markets strategy at Citigroup Inc. in London. “That’s staring to create the notion that policy responses are beginning to get closer to being ahead of the curve. I wouldn’t be surprised to see a higher euro-dollar and a lower dollar against many crosses soon.

The pound traded near an all-time low against the euro and close to its weakest since 2002 versus the dollar as the Bank of England cut its main interest rate by one percentage point to 2 percent, the lowest level since 1951, to stave off the ravages of the credit crisis. U.K. house prices fell the most since 1992 in November as credit dried up, HBOS Plc said today.

An index based on a survey of about 700 U.K. service companies dropped to 40.1 for November, the lowest since the gauge began in 1996, Markit and the Chartered Institute of Purchasing and Supply said yesterday. Consumer confidence fell to the lowest level since at least 2004, Nationwide Building Society said.

Yen Versus Euro

The yen also rose against the euro on speculation the deepening global slowdown spurred investors to sell higher- yielding assets financed by borrowing in Japan. Investors have been reducing carry trades, in which they get funds in a country with low borrowing costs and invest in one with higher interest rates.

Japan’s benchmark rate of 0.3 percent compares with 4.25 percent in Australia and 5 percent in New Zealand.

“Investors will likely shun risk amid growing worries over a worldwide recession,” said Yuji Saito, Tokyo-based head of the foreign-exchange group at Societe General SA. “The yen may be bought.”

Japanese businesses cut investment at the fastest pace in six years last quarter, a government report showed today. Capital spending excluding software fell 13.3 percent in the three months ended Sept. 30, a sixth quarterly decline, the Ministry of Finance said in Tokyo. Economists surveyed by Bloomberg expected a 10.9 percent decline.

New Zealand Cut

New Zealand’s central bank cut its benchmark rate by a record 1.5 percentage points and signaled more to come as it attempts to steer the economy out of recession.

New Zealand’s dollar fell 0.3 percent to 53.43 U.S. cents and 0.3 percent to 49.55 yen.

Sweden’s krona fell close to a record low against the euro as the Riksbank cut the benchmark interest rate by the most in 16 years to revive the ailing economy.

Policy makers, who raised interest rates as recently as September, reduced the repo rate today by 1.75 percentage points to 2 percent, compared with the 1 percentage-point reduction forecast in a Bloomberg survey.

“We clearly see the Riksbank providing a guideline to what will come from the other banks today,” said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt.

The yuan traded at 6.8837 per dollar, near a five-month low, on speculation U.S. Treasury Secretary Henry Paulson’s calls for a stronger yuan during a Beijing visit this week won’t stop China from weakening its currency to support exporters.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net