Euro Falls Against Yen on Speculation ECB to Keep Cutting Rates

By Theresa Barraclough and Ron Harui

March 19 (Bloomberg) -- The euro fell the most in two weeks versus the yen on speculation the European Central Bank will cut interest rates further as the recession in the 16-nation region deepens, undermining the currency’s allure.

Europe’s single currency pared yesterday’s gain versus the dollar, when it surged the most in nine years, before a European Union report tomorrow that may show industrial production dropped the most on record. The yen climbed to a three-week high against the dollar after Federal Reserve Chairman Ben S. Bernanke said the central bank will purchase $300 billion of Treasuries, fueling concern it will weaken the U.S. currency.

“We would caution that the ECB is not far behind” the Federal Reserve in using quantitative easing, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. “The ECB may follow down the same path, which will likely keep a lid on the euro.”

The euro dropped 0.9 percent to 128.55 yen as of 2:43 p.m. in Tokyo from yesterday in New York, the biggest decline since March 5. Europe’s single currency traded at $1.3462 from $1.3474 yesterday when it surged 3.5 percent. The dollar weakened to 95.49 yen from 96.22 yen. It earlier reached 95.35 yen, the lowest since Feb. 24.

The British pound fell to $1.4211 from $1.4275 yesterday. The Swiss franc weakened to 1.1434 per dollar from 1.1411. Against the pound, the euro rose to 94.72 pence from 94.44 pence.

‘Surprisingly Strong’

The ICE’s Dollar Index fell for an eighth day, its longest stretch in a year, after the Fed’s Open Market Committee said in its statement yesterday the central bank will buy $300 billion of longer-term U.S. government debt. It will also purchase an additional $750 billion of agency mortgage-backed securities, in a policy known as quantitative easing.

“This is a surprisingly strong move by the Fed to inject massive amounts of money into the system,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., the world’s third-largest foreign-exchange trader. “It is likely to diminish the appeal of the dollar as a safe haven and lead to further weakness.”

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, declined to 84.302 from 84.595 yesterday. The gauge has fallen 5.9 percent since reaching 89.62 on March 4, the highest level since April 2006.

The euro ended seven days of gains versus the greenback on concern ECB council member Axel Weber will signal the central bank will reduce borrowing costs from the current record low of 1.5 percent. Weber will speak tomorrow in Frankfurt.

‘Lower Rates’

European industrial sales dropped 15.5 percent in January from a year earlier, after falling 12 percent in December, according to a Bloomberg survey of economists before the report.

“There are ongoing expectations for lower rates in the euro-zone,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This is likely to weigh on the euro,” which may decline to $1.34 today, he said.

Investors maintained bets the ECB will reduce borrowing costs at its next policy meeting on April 2. The yield on the three-month Euribor interest-rate futures contract due June was at 1.325 percent from 1.47 percent a week ago, according to data compiled by Bloomberg.

Japan’s currency gained for the first time in six days against the euro on speculation the Japanese government will take more steps to revive growth in the nation’s economy.

Debt Purchases

Finance Minister Kaoru Yosano said today the Bank of Japan’s increased purchases of government debt from lenders may prevent borrowing costs from rising as Prime Minister Taro Aso prepares a third stimulus package. The central bank yesterday said it will raise its monthly government bond purchases to 1.8 trillion yen ($18.3 billion) from 1.4 trillion yen.

“The moves taken by the central bank and the government will probably help to stimulate Japan’s economy,” said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. “This would be positive for the yen,” which may rise to 95.50 against the dollar and 126 per euro in one week, he said.

Prime Minister Aso ordered the latest stimulus last week to counter the nation’s recession. Kyodo News yesterday said the extra spending may reach 15 trillion yen, adding to the 10 trillion yen Aso already pledged since October.

The Nikkei 225 Stock Average fell 0.6 percent. Honda Motor Co., which gets more than half its sales in North America, lost 3.3 percent as the weaker dollar diminished overseas income.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.