By Stanley White
Jan. 13 (Bloomberg) -- The euro traded near a one-month low versus the dollar as traders raised bets the European Central Bank will reduce interest rates, decreasing the appeal of the region’s assets to overseas investors.
The 16-nation currency was also close to the weakest in a month against the yen after Standard & Poor’s said it may cut Spain’s top AAA long-term sovereign rating. The New Zealand dollar declined for a second day after S&P said it may lower the Southern Hemisphere country’s foreign-currency credit rating because of its current-account deficit.
“There is more than enough room for the euro to fall further,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., a unit of Japan’s largest brokerage. “The focus of the currency market is how far rates will fall in Europe, because the ECB is behind the curve compared to other central banks.”
The euro traded at $1.3317 as of 10:27 a.m. in Tokyo from $1.3362 yesterday in New York, when it touched $1.3289, the lowest level since Dec. 12. The euro was at 119.16 yen from 119.19 yen yesterday, when it reached 118.66, also the lowest since Dec. 12. The dollar traded at 89.49 yen from 89.22 yen. It fell to 88.88 yen yesterday, the weakest level since Dec. 19. The euro may decline to $1.25 by next week, Amikura said.
The New Zealand dollar fell to 56.52 U.S. cents from 57.57 cents late yesterday in New York after S&P revised its outlook for New Zealand’s AA+ foreign currency credit rating to negative from stable. The Australian dollar slid to 67.73 U.S. cents from 68.19 cents after prices of oil and other commodities the country exports fell.
European Rates
A Credit Suisse Group AG gauge of probability based on an overnight index-swap index indicated the ECB will cut its 2.5 percent main refinancing rate by as much as 0.75 percentage point this week. The index fell to minus 207.7 from minus 165.6 on Jan. 5. A reading of minus 100 indicates a 0.25 percentage point cut. The median forecast of 59 economists surveyed by Bloomberg News was for a 0.5 percentage point reduction.
The Federal Reserve cut its target lending rate in December to a range of zero to 0.25 percent, while the Bank of England lowered its main rate last week by a half-percentage point to 1.5 percent.
‘Lagging Behind’
“The ECB’s lagging behind the other global central banks in cutting rates will certainly continue to exert downward pressure upon the euro,” Greg Salvaggio, vice president of capital markets in Washington at Tempus Consulting Inc., said in a Bloomberg Television interview. “We are very bullish on the dollar against the euro this year. We’re looking for a year-end target of $1.10.”
Europe’s currency lost 5.9 percent against the yen, 4.6 percent against the dollar and 5.8 percent against the pound this year as reports showed services and manufacturing shrank in December by the most in at least a decade and inflation fell below the ECB’s ceiling of 2 percent for the first time since August 2007.
The yield advantage of two-year German government securities over comparable Japanese debt fell to 1.11 percentage points yesterday, the narrowest in 18 years, reducing demand for euro-denominated assets.
S&P cited “significant challenges” facing the Spanish economy, which has been hit by the combined impact of the global credit crunch and the collapse of a debt-fueled domestic housing boom. The company said it would probably decide on the rating for the nation’s sovereign debt this month.
Fiscal Stimulus
German Chancellor Angela Merkel’s coalition said yesterday the government will spend an extra 50 billion euros ($66.6 billion) in the next two years to stem the worst recession since World War II in Europe’s largest economy.
The coalition parties agreed on a package of measures including about 36 billion euros in infrastructure investment and lower taxes. These measures are the second German stimulus program in the past two months.
“The latest German stimulus package probably won’t be enough to turn back the tide of euro selling,” said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. “It will take time for these measures to kick in, and other European countries will need to join Germany and announce similar policies. During this time, the ECB is sure to lower rates.”
The euro may fall to $1.30 this week, he said.
Obama’s Ammunition
U.S. President-elect Barack Obama said yesterday he wants the second half of a $700 billion financial bailout fund available to him as “ammunition” in the event of an economic emergency and promised to direct more of the money to small businesses and homeowners. Obama, who takes office on Jan. 20, asked President George W. Bush to request the funds from Congress on his behalf after the outgoing president said he was willing to do so.
Treasury Secretary Henry Paulson allocated most of the first $350 billion of the fund for buying stakes in banks, with other distributions for propping up Citigroup Inc., American International Group Inc. and automakers General Motors Corp. and Chrysler LLC.
“Additional fiscal stimulus may support the dollar marginally,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Expectations for the incoming Obama administration are very high. We have to be careful not to get too far ahead of ourselves.”
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net.
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