By Ron Harui and Stanley White
Dec. 4 (Bloomberg) -- The euro declined 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 dropped to its lowest level in almost three weeks versus the greenback as economists forecast the Bank of England will reduce borrowing costs by 1 percentage point. New Zealand’s central bank earlier cut 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 $1.2657 at 7:47 a.m. in London from $1.2717 late in New York yesterday. It reached $1.2563 on Dec. 2, the lowest since Nov. 21. The 15-nation currency dropped to 117.56 yen from 118.64 yen. The dollar slid to 92.85 yen from 93.30 yen.
The pound declined to $1.4671 from $1.4784 yesterday, and touched $1.4659, the weakest level since Nov. 17. South Korea’s won fell 1.2 percent to 15.92466 versus the yen.
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 visit to Beijing this week won’t stop China from weakening its currency to support exporters.
‘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 of economists. 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 that 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 today, according to the median forecast in a separate Bloomberg survey.
The yen rose against the euro on speculation the deepening global slowdown spurred investors to sell higher-yielding assets financed by borrowing in Japan.
Japanese businesses cut investment at the fastest pace in six years last quarter, a government report showed today. In the U.S., General Motors Corp. and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as a last resort of getting a multibillion-dollar government bailout, said a person familiar with their internal discussions.
“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 expected a 10.9 percent decline.
Japan’s Panasonic
The yen’s 20 percent gain against the dollar and 39 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.
New Zealand’s dollar fell 0.1 percent to 53.18 U.S. cents and 0.5 percent to 49.40 yen from late in New York, following the central bank’s rate reduction today.
Canada’s dollar declined for a second day against its U.S. counterpart on speculation Prime Minister Stephen Harper will suspend parliament to stave off defeat at the hands of a united opposition.
‘Political Uncertainty’
The leader of Canada’s Liberal Party, Stephane Dion, said yesterday that Harper’s reluctance to accept defeat in parliament is threatening to undermine the economy. The main opposition Liberal Party agreed on Dec. 1 to form a coalition with the New Democratic Party that would be backed by the separatist Bloc Quebecois during key votes.
“The three opposition parties are saying Harper isn’t doing much during the current crisis and they are trying to force him out of power,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There’s political uncertainty weighing on the Canadian dollar,” which may fall to C$1.2700 versus the greenback today, he said.
Canada’s dollar weakened to C$1.2587 versus the U.S. currency from C$1.2521 yesterday.
To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
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