Euro Declines Toward Eight-Week Low Before Retail Sales Report

By Kim-Mai Cutler and Ron Harui

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 yen gained 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. The British pound weakened versus the U.S. currency on concern an industry report will show U.K. services shrank at close to the fastest pace in 12 years.

“When you look at long-term prospects for the euro, you can’t be positive at all,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA. “Yield spreads between euro-zone countries are widening, which is fundamentally justified.”

The euro fell to $1.2956 as of 9:15 a.m. in London from $1.3040 in New York yesterday. It reached $1.2706 on Feb. 2, the lowest level since Dec. 5. The 16-nation currency declined to 115.40 yen from 116.63 yen. The dollar dropped to 89.08 yen from 89.44 yen.

The pound declined 0.3 percent to $1.4417 from late in New York yesterday. The U.K. currency strengthened to 89.82 pence per euro from 90.16 pence, and it fell 0.7 percent to 128.43 yen from 129.32 yen.

The yen advanced 1.9 percent to 57.13 against Australia’s dollar and strengthened 1.8 percent to 45.13 versus New Zealand’s dollar.

Kazakhstan Devalues Tenge

European currencies also weakened after Kazakhstan’s central bank devalued the tenge 18 percent today, abandoning intervention to preserve its currency reserves.

The nation’s currency will be kept at about 150 tenge to the dollar from Feb. 4, the Almaty-based bank said in a statement. The currency may fluctuate about 3 percent either side of that. The tenge traded at 149.94 per dollar today, down 21.4 percent from yesterday.

The euro declined before the statistics office report that will show Europe’s retail sales fell 1.4 percent in December from a year earlier, according to a Bloomberg News survey of economists. The data is due at 11 a.m. today 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.

‘Walking Away’

Kazakhstan’s central bank is “walking away from supporting the tenge exchange rate in its previous corridor to save foreign currency reserves and support local producers’ competitiveness,” according to the statement.

Kazakhstan follows Russia, Ukraine and Belarus in devaluing its currency as local banks and companies struggle to refinance debt and a recession looms.

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

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 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.”

British Economy

Benchmark interest rates are 3.25 percent in Australia and 3.50 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 declined for a third day against the euro after the National Institute of Economic and Social Research said in a report today the British economy will shrink until the fourth quarter of this year.

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.

‘Risky’ Pound

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, Tokyo-based chief economist at Tokai-Tokyo Securities Co.

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, another Bloomberg survey of economists showed.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.netRon Harui in Singapore at rharui@bloomberg.net;