Euro Declines Toward Eight-Week Low Before Retail Sales Report

By Ron Harui and Yasuhiko Seki

Feb. 4 (Bloomberg) -- The euro fell toward an eight-week low against the dollar before a report that may show retail sales slid for a seventh month, supporting the case for the European Central Bank to cut interest rates.

The British pound weakened versus the greenback on concern an industry report will show U.K. services shrank at close to the fastest pace in 12 years. The yen may gain for a fifth day versus the dollar on speculation widening credit-market losses will erode corporate earnings, prompting investors to sell higher-yielding assets financed in Japan.

“While the ECB is widely expected to stand pat on interest rates this week, speculation about further rate cuts will persist, which will pose strenuous downside risk on the single currency,” said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly listed lender.

The euro fell to $1.3001 as of 12:20 p.m. in Tokyo from $1.3040 late in New York yesterday. It reached $1.2706 on Feb. 2, the lowest level since Dec. 5. The 16-nation currency declined to 116.47 yen from 116.63 yen. The yen traded at 89.57 per dollar from 89.44 yesterday.

The pound declined 0.5 percent to $1.4391 from late in New York yesterday. Against the euro, the currency weakened to 90.34 pence from 90.16 pence. Japan’s currency advanced 0.3 percent to 45.82 against New Zealand’s dollar and 0.3 percent to 58.06 versus Australia’s dollar.

ECB Meeting

The euro fell versus 12 of the 16 most-active currencies before the European Union statistics office report that may show retail sales fell 1.4 percent in December from a year earlier, according to a Bloomberg News survey of economists. The report is due at 11 a.m. in Luxembourg.

“If traders think that the eurozone recession will be more prolonged, that’s ultimately bad news for the euro,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

The ECB will keep its main refinancing rate at 2 percent at a policy meeting tomorrow, according to the median forecast of 53 economists surveyed by Bloomberg.

The yen advanced the most against the Australian and New Zealand dollars among the 16 major currencies as Centex Corp., the second-largest U.S. homebuilder by sales, reported a seventh quarterly loss yesterday after taking a $590 million write-down.

The world’s largest financial firms have announced more than $1 trillion of losses and credit-market writedowns since 2007, according to data compiled by Bloomberg.

‘Risk Reduction’

“Risk reduction has become a key theme,” said Michiyoshi Kato, a senior vice president of currency sales at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest bank by assets. “Investors are buying the yen.”

Benchmark interest rates are 3.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere. In these so-called carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits.

The pound fell for a third day against the euro after the National Institute of Economic and Social Research said in a report today that the British economy will shrink until the fourth quarter of this year.

Economy Shrinks

The U.K.’s gross domestic product will fall 2.7 percent in 2009, compared with a previous forecast of a 0.9 percent contraction, said the institute, whose clients include the Treasury and the Bank of England.

The pound also weakened as a index based on a survey of about 700 U.K. service companies by the Chartered Institute of Purchasing and Supply will likely be 40.3 in January, close to the 12-year low of 40.1 set in November, a separate Bloomberg survey shows. The report is due at 9:30 a.m. in London today.

“It is risky to invest in pound-denominated assets,” said Mitsuru Saito, chief economist at Tokai-Tokyo Securities Co. in Tokyo.

The Bank of England will lower its benchmark rate by a half-percentage point to a record low of 1 percent at its Feb. 5 meeting, a Bloomberg survey of economists showed.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net