Euro Trades Near Eight-Week Low Before Europe Inflation Report

By Ron Harui

Feb. 3 (Bloomberg) -- The euro traded near an eight-week low against the dollar before a report that may show European producer prices fell for a fifth month, giving the region’s central bank more room to cut interest rates.

The pound may weaken for a second day versus the dollar and the euro on speculation a U.K. report today will indicate construction, which accounts for 6 percent of the economy, shrank last month at the fastest pace in more than a decade. The yen fell against the Australian and New Zealand dollars after the Australian government said it will spend A$42 billion ($26.7 billion) to help prevent the economy from entering a recession.

“European currencies such as the euro and the pound are likely to remain under downward pressure,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “There are still worries over their economies.”

The euro traded at $1.2847 as of 8:07 a.m. in London from $1.2843 late in New York yesterday, when it reached $1.2706, the lowest level since Dec. 5. The European currency was at 115.30 yen from 114.89 yen. The dollar traded at 89.68 yen from 89.59.

The pound was at $1.4250 from $1.4264 in New York yesterday, and weakened to 90.30 pence per euro from 90.03. The yen dropped 1.4 percent to 57.30 against the Australian dollar, and 0.7 percent to 45.39 versus the New Zealand dollar.

Producer Prices

Europe’s single currency may pare gains against the yen as prices of goods leaving euro-area factories may have dropped 1.2 percent in December after a 1.9 percent decline in November, according to a Bloomberg News survey of economists. The European Union statistics office will release the report at 11 a.m. in Luxembourg today.

European Central Bank President Jean-Claude Trichet reiterated in an interview on Bloomberg Television at the World Economic Forum in Davos, Switzerland, last week that the central bank’s next important meeting is in March, signaling policy makers will keep the rate unchanged at 2 percent on Feb. 5.

“As most recent data releases confirmed a further weakening in growth conditions, and inflation fell at a faster pace than initially anticipated, the probability for a policy step this week has risen considerably,” analysts led by Zurich- based Mansoor Mohi-Uddin at UBS AG, the second-biggest currency trader last year, wrote in a research report yesterday. “We expect the euro to remain in a broad downtrend.”

The pound weakened versus 13 of the 16 most-active currencies as a U.K. index based on a survey of purchasing managers at building companies may have dropped 29 in January, the lowest since the survey began in April 1997, a separate Bloomberg survey showed. The Chartered Institute of Purchasing and Supply and Market releases the data at 9:30 a.m. in London.

‘Unconventional Measures’

The U.K. currency may decline for a second day versus the yen as investors maintained bets that the Bank of England will cut interest rates at its next meeting on Feb. 5 to help counter the nation’s recession.

“The central bank is likely to reduce rates further and will probably start taking unconventional measures,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “This may weigh on the pound.”

The Bank of England may lower its 1.5 percent benchmark rate an additional 44.7 basis points over the next 12 months, a Credit Suisse Group AG index based on swaps showed on Jan. 30. A basis point is 0.01 percentage point.

The yen snapped three days of gains versus the greenback and the euro, after the Bank of Japan announced today it will buy 1 trillion yen ($11.2 billion) of shares held by financial companies, reviving demand for higher-yielding assets.

‘Positive Impact’

Japan’s currency also weakened against Australia’s dollar after Australian Treasurer Wayne Swan announced the spending package, which includes A$12.7 billion in grants to families and low-income earners and A$28.8 billion for infrastructure. The package will help the economy grow 1 percent this fiscal year and 0.75 percent in the year ending June 30, 2010, government figures show.

“The packages being announced by governments worldwide are likely to have a large positive impact on market sentiment,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-biggest lender. “The yen may be sold.”

The yen remained lower after the Reserve Bank of Australia cut its benchmark rate by 1 percentage point to 3.25 percent at a meeting today. The rate decision was forecast by economists surveyed by Bloomberg.

Benchmark 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.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.