Euro Advances on Speculation ECB Will Slow Pace of Rate Cuts

By Ron Harui and Yasuhiko Seki

March 9 (Bloomberg) -- The euro rose for a second day against the dollar and the yen on speculation European Central Bank policy makers will slow the pace of interest-rate cuts.

Europe’s single currency approached a one-week high against the greenback after ECB Executive Board member Juergen Stark said reducing borrowing costs won’t remedy the financial crisis and pushing them too low may backfire. The Australian and New Zealand dollars gained as Asian stocks advanced, signaling improving demand for higher yielding assets.

“The ECB looks like it’ll lower rates slowly and may even stop at 1 percent,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is supportive for the euro.”

The euro advanced to $1.2709 as of 10:05 a.m. in Tokyo from $1.2653 late in New York last week. The currency climbed to 124.83 yen from 124.34 yen. The yen traded at 98.22 against the dollar from 98.25 on March 6.

The Australian dollar advanced 0.5 percent to 63.25 yen and the New Zealand dollar climbed 0.6 percent to 49.66 yen from late in New York last week. The MSCI index of stocks in Asia outside Japan gained 0.6 percent.

“The financial crisis can’t be solved with rate cuts,” Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper today. “Too low a rate level can even be counter-productive.”

Stark speaks at 10 a.m. in Luxembourg today and fellow board members Axel Weber and John Hurley speak tomorrow. ECB Governing Council member Axel Weber said on Feb. 24 that he sees a benchmark lending rate of 1 percent as the “lowest limit.”

ECB Rates

Investors raised bets the ECB will keep its benchmark rate at 1.5 percent at its April 2 meeting. The yield on the three- month Euribor three-month interest-rate futures due in April rose to 1.57 percent on March 6 from 1.56 percent on March 5.

The yen declined against 11 out of 16 major currencies after a government report showed Japan posted a current-account deficit in January for the first time in 13 years.

The Japanese currency weakened after the Ministry of Finance said the world’s second-biggest economy recorded a deficit of 172.8 billion yen ($1.76 billion), compared with a median estimate for a 15.3 billion yen shortfall in a Bloomberg News survey of economists.

“There is lingering concern about the trend of exports due to the continued global recession,” said Akio Yoshino, chief economist at Societe Generale Asset Management (Japan) Inc. in Tokyo. “Declines in exports mean less need for Japanese companies to repatriate sales generated outside Japan.”

World Bank

The World Bank said yesterday the global economy is likely to shrink for the first time since World War II, and trade will decline by the most in 80 years.

The bank’s assessment is more pessimistic than an International Monetary Fund report in January predicting 0.5 percent global growth this year. The Washington-based World Bank didn’t provide a specific estimate in its report.

Japan’s export-oriented economy shrank an annualized 12.7 percent last quarter, the government said Feb. 16, the biggest contraction since the 1974 oil crisis. A Cabinet Office report on March 11 may show machinery orders slumped 40.2 percent in January from a year earlier, according to a Bloomberg survey.

The Dollar Index, which the ICE uses to track the greenback’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, increased to 89.624 on March 4, the highest level since April 2006, before ending last week up 0.6 percent.

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