Euro Is Near Two-Week Low as ECB May Cut Rates to Combat Slump

By Stanley White

Dec. 3 (Bloomberg) -- The euro traded near the lowest level in almost two weeks against the dollar before a report that may show the region’s retail sales fell, giving the European Central Bank more reason to cut interest rates tomorrow.

The 15-nation currency was also near its weakest versus the yen in more than a week as economists forecast the ECB will reduce its benchmark rate by half a percentage point to 2.75 percent. The British pound traded near the lowest in more than a week against the dollar on expectations the Bank of England will cut its rate by 1 percentage point tomorrow to 2 percent as policy banks around the world seek to combat an economic slump.

“The bias is for the euro and the pound to go lower,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc. “We’re talking about cuts of as much as 1 percentage point, if not more. The poor economic outlook is a negative factor.”

The euro traded at $1.2689 as of 7:57 a.m. in London from $1.2714 late yesterday in New York, when it fell to $1.2563, the lowest level since Nov. 21. It bought 118.38 yen from 118.44 yen yesterday, when it touched 116.57 yen, also the weakest since Nov. 21. The pound fell to $1.4899 from $1.4920. The dollar was quoted at 93.32 yen from 93.18 yen.

European retail sales declined 1.5 percent in October from a year earlier, according to a Bloomberg News survey, following a 1.6 percent decline in the previous month. The European Union’s statistics office will release the report at 11 a.m. in Luxembourg today.

Consumer Confidence

U.K. consumer confidence deteriorated in November to the weakest in at least four years as unemployment jumped and banks curtailed credit, Nationwide Building Society said today. Tumbling house prices and a drop in consumer demand have weakened Britain’s economy, sending the pound 25 percent lower against the dollar this year.

“We remain bearish on the pound,” analysts led by Hans- Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France’s biggest bank, wrote in a research note yesterday. “We expect the BOE to deliver 1 percentage point of easing, especially given that the minutes of the previous meeting have revealed that an even greater cut was discussed at that time.”

U.S. Economy

The dollar traded near a five-week low against the yen before reports that economists say will show accelerating U.S. job cuts and a deepening contraction in services.

ADP Employer Services will report at 8:15 a.m. New York time that companies cut 205,000 jobs last month, following a reduction of 157,000 in October, according to a Bloomberg survey. Payrolls, including government employees, shrank by 325,000 workers in November, the biggest one-month drop since the 2001 terrorist attacks, a separate survey showed before the Labor Department’s Dec. 5 report.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the U.S. economy, fell to 42, the lowest level since records began in 1997, according to a Bloomberg survey before the report at 10 a.m. New York time today. Readings below 50 indicate a contraction.

The U.S. economy entered a recession in December 2007, the first since 2001, The National Bureau of Economic Research said on Dec. 1.

“There is a risk that the dollar will go lower,” said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan’s second- largest publicly traded lender. “Disappointing economic data would highlight the extent of the U.S. recession and undermine confidence in buying the dollar.”

Low Yields

Ten-year Treasuries yielded 2.72 percent today, near 2.65 percent on Dec. 1, the lowest since the Federal Reserve’s daily records started in 1962. The Fed may use less conventional policies, such as buying Treasuries, because there is limited room to lower the target lending rate from the current 1 percent, Chairman Ben S. Bernanke said Dec. 1.

“The market is not willing to drive the dollar much higher right now,” said Sharada Selvanathan, a currency strategist at BNP Paribas SA in Hong Kong. “One of the reasons for that is we’re seeing U.S. yields collapsing quite sharply each day and on the yields perspective, the market is a little cautious in going long dollar right now.”

The dollar will trade in a range from $1.25 to $1.31 per euro into the end of the year, while it will weaken to 91 yen, she said. Going long is a bet a currency will rise.

U.S. Automakers

General Motors Corp. asked U.S. lawmakers for $12 billion in loans and an additional credit line of $6 billion, as it tries to shrink domestic employment by 34 percent, close plants and emphasize only four of eight current U.S. brands, according to a statement yesterday on its Web site. Ford Motor Co. asked Congress for a credit line of as much as $9 billion, while Chrysler LLC sought $7 billion in loans as U.S. carmakers struggle with declining sales due to the recession.

“I’m wary of the U.S. automakers because they seem to be asking for a lot of money and a resolution may not come quickly,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The fact that the U.S. government has to consider supporting these major companies is unsettling for the dollar.”

The U.S. currency may fall to 92.50 yen today, he said.

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