Euro Trades Near Five-Week Low Versus Dollar Before ECB Meeting

By Stanley White and Ron Harui

Jan. 15 (Bloomberg) -- The euro traded near a five-week low against the dollar on speculation the European Central Bank will cut interest rates by a least half a percentage point at a policy meeting today.

The yen strengthened versus the New Zealand dollar after a U.S. report showing retail sales slumped raised concern the global recession is deepening, boosting the haven appeal of the Japanese currency. The Australian dollar fell to a five-week low versus the greenback after the country’s unemployment rate rose to the highest level in almost two 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.”

The euro bought $1.3169 as of 10:52 a.m. in Tokyo from $1.3191 late yesterday in New York, when it touched $1.3093, the lowest level since Dec. 11. The euro traded at 117.31 yen from 117.46 yen. It fell yesterday to 116.58 yen, the weakest level since Dec. 5. The dollar bought 89.10 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 Australian dollar declined to 65.96 U.S. cents from 66.11 cents late yesterday in New York. It fell to 65.63 cents, the lowest level since Dec. 12, after the government said Australia’s jobless rate rose to 4.5 percent in December, adding to signs the economy is facing its first recession since 1991.

Korean Won

The South Korean won weakened 1.3 percent to 1,366.20 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 yen advanced to 47.81 versus the New Zealand dollar from 48.29 late yesterday in New York. The MSCI Asia Pacific Index of regional shares slid 3.2 percent after U.S. retail sales fell 2.7 percent in December, more than twice the amount economists forecast.

The yen has advanced against all major currencies this year, rising 9.5 percent versus the New Zealand’s dollar. Japan’s 0.1 percent benchmark rate compares with 5 percent in New Zealand.

“Given the intense risk aversion that’s in the market, the yen is the best looking currency in a contest of ugly currencies across the board,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Over the next six months, as the global economy slows sharply and earnings releases disappoint to the downside, that risk aversion will remain elevated and deteriorate further.”

Dollar Index

The Dollar Index traded on ICE futures, which tracks the greenback versus six major U.S. trading partners, touched 84.64 yesterday, the strongest since Dec. 11, as investors flocked from higher-yielding assets into U.S. Treasuries for safety.

The index has gained 3.8 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.

“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.”

Deutsche Bank

The euro began to weaken after Deutsche Bank AG, Germany’s largest bank, reported a record loss of about 4.8 billion euros ($6.32 billion) in the fourth quarter.

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 European currency rose 10 percent versus the dollar in December when ECB President Jean-Claude 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 6 percent versus the dollar this month.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.