Euro Heads for Biggest Weekly Fall in One Month Against Dollar

By Yasuhiko Seki and Ron Harui

Feb. 20 (Bloomberg) -- The euro headed 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 is set for its seventh weekly decline in eight weeks after ECB council member Erkki Liikanen flagged the possibility of using unorthodox monetary policy to deal with a deepening recession and the financial system’s meltdown. The yen headed for a fourth weekly drop versus the dollar, the longest losing stretch since December 2007, on speculation demand for the currency as a haven will wane.

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

Europe’s currency dropped to $1.2620 as of 11:31 a.m. in Tokyo from $1.2674 late in New York yesterday. It touched $1.2513 on Feb. 18, the lowest level since Nov. 21. The euro weakened to 118.76 yen from 119.37 yesterday, when it reached 120.34 yen, the highest level since Jan. 19. The U.S. currency traded at 94.11 yen, from 94.20 yesterday.

The ECB’s Liikanen said the bank hasn’t used all the tools at its disposal to revive the economy, which is facing its worst recession since World War II.

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

Interest Rates

The ECB cut its benchmark interest rate by 2.25 percentage points since early October to 2 percent. The bank may lower borrowing costs further at its next meeting on March 5, Trichet and Liikanen have both said. A Bloomberg News survey of 20 analysts shows that the ECB will lower the borrowing cost to 1.5 percent at the March meeting.

Declines 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.

Germany’s Merkel

Germany’s Chancellor Angela Merkel said yesterday in Berlin 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.

Goldman Sachs Group Inc. said yesterday the euro will strengthen more than 6 percent to $1.35.

Poland’s zloty rose 0.5 percent to 4.7935 per euro and the Czech koruna eased 0.2 percent to 28.972. The koruna touched 29.68 on Feb. 17, the weakest level since October 2005.

“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.”

Dollar Index

The ICE’s Dollar Index was poised for a second weekly gain on speculation that the U.S. government’s 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 bias is for the dollar to be bought” to 94.50 yen and $1.2630 per euro today, he said.

The yen fell against 12 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.

Yen Weakens

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 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 yen’s losses were limited as Japanese exporters sold the greenback to hedge the cost of sales generated outside Japan before the country’s fiscal year ends next month.

“The dollar has visited levels not seen since early this year, giving impetus for exporters to sell the currency” at between 95 yen and 98 yen, said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

The yen surged 23 percent against the dollar last year, crippling exports from Pioneer Corp., Toyota Motor Corp. and Sony Corp., all of which have cut jobs.

“A rate stronger than 100 makes things difficult,” said Takeo Fukui, president of Japan’s second-largest automaker, Honda Motor Co. “It will not be easy to make a profit next fiscal year.”

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