Euro Drops in Longest Stretch of Losses Since November on ECB

By Molly Seltzer and Ye Xie

Jan. 17 (Bloomberg) -- The euro dropped against the dollar for a third week in its longest losing stretch since November as the European Central Bank cut borrowing costs by a half- percentage point and signaled it may lower interest rates again.

The 16-nation currency touched a six-week low versus the yen as Standard & Poor’s cut the credit rating of Greece and threatened to downgrade the debt of Portugal and Spain. The yen and the dollar gained against most of their major counterparts as losses at Bank of America Corp. and Citigroup Inc. encouraged investors to take refuge in the currencies.

“I am bearish on the euro,” said Neil Mackinnon, chief economist in London at ECU Group Plc and a former U.K. Treasury official, in an interview on Bloomberg Television. “The ECB is still behind the curve in my view. A half-point move is not enough.”

The euro fell 1.6 percent to $1.3267 yesterday from $1.3476 on Jan. 9, losing 5 percent so far in 2009. The currency dropped 1.2 percent to 120.37 yen from 121.81 and touched 116.23 on Jan. 15, the lowest level since Dec. 5. The dollar gained 0.4 percent to 90.72 yen from 90.39 a week earlier.

Russia’s ruble slid as much as 0.9 percent to 32.6675 per dollar yesterday, the weakest level since Russia redenominated the currency in 1998, after the central bank accelerated its devaluation to stem the drain on foreign-exchange reserves. Bank Rossii devalued the currency for the fifth time in six days, a central bank official said, more than twice the pace in November and December. The ruble depreciated 5 percent this week.

Weaker Won

Canada’s dollar posted its worst weekly performance since October as the nation’s trade surplus dropped in November to the narrowest level in more than a decade. The currency declined 4.7 percent to C$1.2431 per U.S. dollar.

South Korea’s won, Asia’s worst performer against the dollar last year, posted a fourth weekly loss on concern the deepening global recession will hurt demand for exports and further U.S. bank failures will prompt hoarding of dollars. The won dropped 1.1 percent to 1,358.20 versus the greenback.

The euro weakened versus the dollar on Jan. 15 as the ECB lowered the main refinancing rate to 2 percent, matching a record low, and signaled it’s likely to cut interest rates further. The benchmark borrowing cost compares with 1.5 percent in the U.K. and a range of zero to 0.25 percent in the U.S. The ECB isn’t planning to lower borrowing costs to zero, President Jean-Claude Trichet said in an interview with Japanese public broadcaster NHK yesterday.

S&P on Jan. 14 cut Greece’s sovereign credit rating by one level to A- after threatening to drop Portugal’s AA- and Spain’s AAA credit ratings earlier in the week.

‘Talk’ of Breakup

“Talk of a euro breakup on sovereign debt downgrades is premature at this point, although the talk is getting louder,” wrote Dustin Reid, director of currency strategy at RBS Global Banking & Markets in Chicago, in a note yesterday.

The U.S. currency gained 8.5 percent to 54.64 cents per New Zealand dollar as deepening losses at financial firms led investors to seek the relative safety of U.S. Treasuries.

Bank of America reported yesterday its first loss since 1991 and got a $138 billion federal lifeline, while Citigroup Inc. posted an $8.29 billion loss, twice as much as analysts estimated, and said it will be split into two.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, touched 85.137 on Jan. 15, the highest since Dec. 11. U.S. Treasuries rallied this week, pushing the two-year note’s yield three basis points lower to 0.72 percent.

‘Vicious Cycle’

“There’s this risk of a vicious cycle, where the economy is weak, and that leads to further weakness in companies and maybe further bankruptcies,” said Meg Browne, a currency strategist at Brown Brothers Harriman & Co. in New York. “It’s a reminder of the risks we still face, and I think that’s a dollar positive.”

The yen gained 4.1 percent this week to 61.08 against Australia’s dollar and 7.8 percent to 49.61 versus New Zealand’s dollar. A 4.5 percent drop in the Standard & Poor’s 500 Index prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan’s currency. Its 0.1 percent target lending rate compares with 4.25 percent in Australia and 5 percent in New Zealand.

Japan’s yen advanced to 113.64 per euro on Oct. 27, the strongest since 2002, as coordinated rate cuts by major central banks on Oct. 8 and financial-system bailouts in the U.S. and Europe failed to revive stock markets.

To contact the reporters on this story: Molly Seltzer in New York at mseltzer4@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net