Euro Falls Against Yen as EU Inflation May Allow for Rate Cuts

By Stanley White

Jan. 6 (Bloomberg) -- The euro fell against the yen and traded near a three-week low versus the dollar before European Union data that may show inflation slowed in December, giving the European Central Bank more room to lower interest rates.

The greenback advanced against the South Korean won and the Malaysian ringgit on optimism U.S. President-elect Barack Obama’s stimulus package may total as much as $1.3 trillion. The yen rose against the dollar on speculation Japanese investors took advantage of its decline yesterday to buy the currency on the cheap to repatriate overseas earnings.

“The market is leaning toward euro selling,” said Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking Co. in Tokyo. “There are growing signs the ECB will cut rates. Speculation Obama’s stimulus package will be large enough to help the U.S. economy is also supportive for the dollar.”

The euro fell to 127.11 yen at 9:20 a.m. in Tokyo from 127.31 yen late yesterday in New York. The euro traded at $1.3614 from $1.3635, when it touched $1.3547, the lowest level since Dec. 15. The dollar was at 93.10 yen from 93.44 yen. It rose yesterday to 93.60 yen, the highest level since Dec. 8. The euro may decline to $1.3550 today, Iizuka said.

The dollar rose to 1,320.95 South Korean won from 1,313.75 and gained to 3.5083 Malaysian ringgit from 3.4975. Against the Singapore dollar, the U.S. currency rose to S$1.4732 from S$1.4706.

ECB Policy

Inflation in the euro area probably slowed to 1.8 percent last month, according to the median forecast of 28 economists surveyed by Bloomberg News. The report from the European Union’s statistics office in Luxembourg is due today. The rate fell to 2.1 percent in November from 3.2 percent the prior month, the biggest reduction since at least 1991.

“Poor economic fundamentals in euroland warrant further rate cuts from the ECB,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The interest-rate differential is moving in favor of the dollar again.” The euro may fall to $1.30 in three months, said Upadhyaya.

The ECB cut interest rates by 1.75 percentage points since early October to 2.5 percent as the region entered a recession. The ECB’s next policy decision is due on Jan. 15.

Obama’s Stimulus

Obama “has indicated that there’s at least 20 economists that he’s talked with, and all but one of those believe it should be from $800 billion to $1.2 trillion or $1.3 trillion,” Senate Majority Leader Harry Reid said after meeting with the president- elect on Capitol Hill. Obama will take office on Jan. 20.

“I am very bullish on the dollar throughout 2009,” said Matt Esteve, foreign-exchange trader at currency-trading firm Tempus Consulting Inc. in Washington, in an interview on Bloomberg Television. “I think it’s because the U.S. economy is best set for recovery in 2009.”

The dollar will advance to $1.10 per euro and 110 yen by year-end, according to Esteve.

The yen advanced to 66.33 per Australian dollar from 66.97 late yesterday in New York. The yen pared yesterday’s 2.5 percent decline against the currency on speculation Japanese investors and exporters repatriated overseas earnings.

“When the yen comes back to Tokyo as cheaply as it did today, some Japanese investors can’t pass up the chance to buy it,” said Takeshi Tokita, vice president of foreign-exchange sales in Tokyo at Mizuho Corporate Bank, a unit of Japan’s second-largest publicly traded lender.

The yen may move between 92.60 and 93.40 versus the dollar today, he said.

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