Euro Falls, Set for Weekly Loss, as Trichet May Signal Rate Cut

By Yasuhiko Seki and Ron Harui

Feb. 20 (Bloomberg) -- The euro fell, set for the biggest weekly decline in a month against the dollar, on speculation European Central Bank President Jean-Claude Trichet will signal in a speech today that he may cut interest rates to spur growth.

The 16-nation currency headed for its seventh weekly loss in eight weeks after ECB council member Erkki Liikanen said the bank has not used all the tools at its disposal to revive the region’s flagging economy. South Korea’s won weakened beyond 1,500 per dollar for the first time in three months on concern falling exports will worsen a shortage of dollars and strain the ability of local banks to repay debt.

“The outlook for a narrowing interest-rate differential is negative for the euro,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management Ltd., a unit of France’s third-largest bank. “The euro may fall to below $1.25 in the near future.”

Europe’s currency dropped to $1.2601 as of 8:10 a.m. in London from $1.2674 late in New York yesterday. It has fallen 2 percent this week, the biggest decline since the five days to Jan. 23. The euro touched $1.2513 on Feb. 18, the lowest since Nov. 21. It weakened to 118.20 yen from 119.37 yesterday.

The yen traded at 93.80 per dollar from 94.20 in New York yesterday. The won slumped 1.7 percent to 1,506 per dollar at the close of trading in Seoul, completing this year’s biggest weekly drop of 6.8 percent, according to Seoul Money Brokerage Services Ltd. It touched 1,515, the weakest since Nov. 24.

‘Not Exhausted’

“I’m convinced that we have not exhausted our creativity and our capacity to take initiatives,” Liikanen, who also heads the Bank of Finland, said in an interview with Finnish newspapers Turun Sanomat and Kaleva published today.

The ECB cut its benchmark interest rate by 2.25 percentage points since October to 2 percent. The bank may lower borrowing costs again at its next meeting on March 5, Trichet and Liikanen have both said. Policy makers will lower the benchmark to 1.5 percent at their March meeting, according to a Bloomberg News survey of economists.

The ECB’s key rate compares with 1 percent in the U.K., a range of between zero and 0.25 percent in the U.S., and 0.1 percent in Japan.

The decline in the euro may be limited as speculation eases that eastern European banking losses will cause regional financial turmoil to worsen.

French Finance Minister Christine Lagarde, after talks yesterday with U.S. Treasury Secretary Timothy Geithner, said she wants the Group of 20 to take swift action to help end the global financial crisis. Countries sharing the euro need “to avoid severe difficulties of the kind that would require the involvement of the IMF,” she said.

Bail Outs

Germany’s Chancellor Angela Merkel said yesterday the region is “strong.” She declined to comment on whether Europe’s largest economy would step in to bail out any of the 16 euro members, saying she won’t speculate on the relative health of other countries.

“Optimism for possible financial aid to Eastern European nations is emerging,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. “This will weaken selling of the euro for now.”

Investors should buy the euro as it will strengthen to $1.35 because the European Union may bail out member states in financial difficulties, Goldman Sachs Group Inc. said yesterday

Dollar Index

ICE’s Dollar Index was poised for a second weekly gain on speculation the U.S. government’s stimulus plans will help stem the recession in the world’s largest economy.

The Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, rose to a three-month high on Feb. 18 as President Barack Obama signed a $787 billion economic-stimulus bill on Feb. 17 and proposed a $275 billion housing program the next day. The dollar strengthened against all 16 major currencies this week.

“The Obama administration is acting quickly and proactively in taking policy steps,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker.

The yen fell against 10 of 16 major currencies this week as Finance Minister Shoichi Nakagawa quit, spurring concern the government’s 10 trillion yen ($106 billion) stimulus plan will stall in parliament. Japan’s economy shrank the most since 1974 last quarter, a Cabinet Office report showed Feb. 16.

The dollar rose above 94 yen yesterday for the first time since Jan. 7 when it touched a year-to-date high of 94.63 yen. The yen also headed for its biggest weekly decline since October.

Safe Haven

“The yen seems to have lost some of its ‘safe-haven’ status,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “It’s become evident Japan is not immune to the global recession and the sudden resignation of the nation’s finance minister has raised fears fiscal spending plans may be delayed.”

Japan’s current-account surplus makes the yen attractive to investors in times of turmoil as it means the country doesn’t rely on overseas lenders.

The won fell every day this week, extending its decline this year to 16 percent, the worst performer of the 10 most- traded Asian currencies outside Japan, according to Bloomberg data.

“The won has come under pressure with concerns about dollar funding in Korea and repaying of short-term debt,” said Callum Henderson, head of global currency strategy at Standard Chartered Plc in Singapore. “There’s a significant amount of short-term debt coming due.”

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