Euro Falls as Traders Bet on Half-Percentage Point ECB Rate Cut

By Ron Harui and Stanley White

Dec. 4 (Bloomberg) -- The euro fell against the dollar and the yen on speculation the European Central Bank will cut interest rates by half a percentage point today, reducing the appeal of assets denominated in the currency.

The British pound was also near a two-week low versus the greenback as economists forecast the Bank of England will lower borrowing costs by 1 percentage point today. New Zealand’s central today reduced its benchmark rate by a record 1.5 percentage points to 5 percent and signaled more to come as it attempts to steer the economy out of recession.

“Selling the euro and the pound will remain in vogue for some time to come,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The ECB and the BOE are likely to cut rates into next year. This will increase downward pressure on their currencies.”

The euro fell to $1.2689 as of 10:28 a.m. in Tokyo from $1.2717 late in New York yesterday. It reached $1.2563 on Dec. 2, the lowest level since Nov. 21. The 15-nation currency dropped to 118.33 yen from 118.64 yen. The dollar traded at 93.25 yen from 93.30.

The pound declined to $1.4752 from $1.4784 yesterday, when it touched $1.4666, the weakest level since Nov. 17. Sweden’s krona fell 0.4 percent to 11.345 yen and Denmark’s krone weakened 0.3 percent to 15.8719 yen.

The euro may drop to $1.2675 and the pound may slide to $1.4715 today, Soma said.

‘Euro Zone Recession’

The ECB will lower its benchmark rate to 2.75 percent from 3.25 percent today, according to a Bloomberg News survey. European retail sales declined a larger-than-expected 2.1 percent in October, data showed yesterday, as widening financial turmoil took its toll on consumer confidence.

“Recent data suggests the euro zone recession may last longer than first anticipated and adds to the case for the ECB to cut interest rates aggressively,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “For euro-dollar, this suggests a visit to the recent lows of between $1.23 and $1.24 is likely.”

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.

Bank of England

The Bank of England will lower its main interest rate to 2 percent from 3 percent when it meets today, according to the median forecast of a separate Bloomberg survey.

The yen may rise for a second day against the euro on speculation the deepening global slowdown will spur investors to sell higher-yielding assets financed in Japan.

A government report today showed Japanese businesses cut investment at the fastest pace in six years last quarter.

“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.”

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 News expected a 10.9 percent decline.

The yen’s 20 percent gain against the dollar and 38 percent advance versus the euro this year has increased the cost of Japanese exports. Panasonic Corp., the biggest maker of consumer electronics, said last week that gains in the currency would shave 22 billion yen ($236 million) from its profit this year.

Japan’s benchmark rate of 0.3 percent compares with 4.25 percent in Australia, 5 percent in New Zealand and 3.25 percent in the euro region.

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, earning the spread between the two. The risk is that currency market moves erase those profits.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.