By Stanley White and Ron Harui
Jan. 15 (Bloomberg) -- The euro fell, approaching a five- week low against the dollar, on speculation the European Central Bank will cut interest rates by at least half a percentage point at a policy meeting today.
The yen strengthened versus higher-yielding currencies after a slump in U.S. retail sales raised concern the global recession is deepening, boosting the appeal of the Japanese currency. The New Zealand dollar declined to a seven-year low versus the Japanese currency after home prices in the South Pacific country declined by the most in three years.
“There’s no doubt that the ECB will cut rates by 50 basis points, with some expecting 75 and even 100 basis points,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. “It’s obvious that the euro zone’s economy is worsening. There’s a downside risk for the euro.” A basis point is 0.01 percentage point.
The euro bought $1.3153 as of 7:48 a.m. in London from $1.3191 late yesterday in New York, when it touched $1.3093, the lowest level since Dec. 11. The euro traded at 117.13 yen, versus 117.46 yen. It fell yesterday to 116.58 yen, the weakest level since Dec. 5. The dollar bought 89.04 yen from 89.05 yen.
Europe’s single currency may “test” yesterday’s low of $1.3093 and 116.58 yen today, Muramatsu said.
The New Zealand dollar dropped as low as 47.40 yen, the weakest since September 2001, and also weakened to 53.46 U.S. cents from 54.24 cents late yesterday in New York. The nation’s house prices fell 7.4 percent in December, the biggest decline since 2005.
Australian Dollar
The Australian dollar touched 65.62 U.S. cents, the lowest level since Dec. 12, after the government said Australia’s jobless rate rose to 4.5 percent in December, the highest in almost two years. The currency last traded at 65.83 cents from 66.11 yesterday.
The South Korean won weakened 3.3 percent to 1,392 per dollar after Vice Finance Minister Bae Kook Hwan said economic growth this year may fall short of predictions from the Bank of Korea and the International Monetary Fund.
The MSCI Asia Pacific Index of regional shares slid 4 percent and the Nikkei 225 Stock Average lost 4.9 percent after a U.S. report yesterday showed retail sales fell in December by more than twice the amount economists forecast.
The yen has advanced against all major currencies this year, rising 10 percent versus the New Zealand’s dollar. Japan’s 0.1 percent benchmark rate compares with 5 percent in New Zealand.
Yen Strength
“There seems to be a correlation between weaker equities and a stronger yen,” said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “With shares falling, the yen is likely to strengthen.”
Japan’s currency may rise to 88.50 against the dollar and 115.50 per euro today, Sakai said.
The Dollar Index traded on ICE futures, which tracks the greenback versus six major U.S. trading partners, was little changed at 84.508 today. It touched 84.639 yesterday, the strongest level since Dec. 11, as investors shunned higher- yielding assets and flocked to U.S. Treasuries for safety.
The index has gained 4 percent this year, after losing 6 percent in December, when the Fed lowered its benchmark interest rates to a range between zero and 0.25 percent, a record low.
Risk Appetite
“The improvement in the tone of risk appetite since earlier this year had a set-back,” said Todd Elmer, a currency strategist at Citigroup Global Markets in New York. “The correlation between risk aversion and a stronger dollar is not over yet. That means continued strength in the dollar versus high-yielding assets.”
A Credit Suisse Group AG gauge of probability based on overnight index swaps indicated the ECB will lower its 2.5 percent main rate by at least half a percentage point today, with 7 percent odds that the cut will be deeper. The median forecast of economists surveyed by Bloomberg is for a 0.5 percentage-point reduction. The central bank decision is due at 1:45 p.m. in Frankfurt today and President Jean-Claude Trichet will hold a briefing from 2:30 p.m.
The European currency rose 10 percent versus the dollar in December when Trichet said he didn’t want to be “trapped” with borrowing costs too low. The rally reversed this month as speculation mounted that the ECB will be forced to cut interest rates again as the economic slowdown deepened. The euro lost 5.7 percent versus the dollar this month.
Earnings Season
The dollar may be supported by speculation widening losses at financial institutions will prompt U.S. investors to favor their own currency as a haven.
JPMorgan Chase & Co. will report fourth quarter earnings today in New York. Citigroup Inc. will issue earnings tomorrow and Bank of America Corp. will post results on Jan. 20.
The world’s largest banks have lost $1 trillion since the start of 2007 on mortgage-related securities.
“Expectations for fourth-quarter earnings are low and financial institutions will likely report further losses and writedowns,” Brian Kim, a Stamford, Connecticut-based currency strategist at UBS AG, wrote in a research note yesterday. “We expect the dollar to remain supported as capital preservation becomes increasingly important.”
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: January 15, 2009 03:00 EST
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