Euro Advances After ECB Cuts Interest Rate Less Than Forecast

By Anchalee Worrachate

April 2 (Bloomberg) -- The euro rose against the dollar and the yen after the European Central Bank lowered its benchmark interest rate by 25 basis points, less than forecast.

The 16-nation currency also strengthened versus the Swiss franc as the central bank cut the main refinancing rate to 1.25 percent, compared with the 50 basis points economists expected. ECB President Jean-Claude Trichet may say at a press conference at 2.30 p.m. in Frankfurt whether policy makers are ready to use unconventional measures such as printing money to drag the economy out of its worst recession since World War II.

“The ECB has always been a little reluctant to follow in the footsteps of the Anglo-Saxon central banks” on rates cuts, said Neil Mellor, a strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of assets. “More importantly, people will want to hear if they will start talking about other measures” to help the economy, he said.

The euro rose to $1.3361 as of 12:48 p.m. in London from $1.3249 yesterday. It climbed to 132.75 yen from 130.52 yen.

The ECB lowered its key interest rate by 300 basis points since early October as confidence fell to an all-time low and unemployment rose to the highest level in almost three years.

The ECB may “play it cautiously today in regard to signaling any imminent shift toward some form of quantitative easing,” Derek Halpenny, London-based European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a client note today. “A cautious ECB should help relative yield developments underpinning the euro” against the dollar.

Yen Declines

The yen fell, approaching 100 per dollar for the first time in five months, as stocks advanced on speculation the worst of the global economic slump may be ending, boosting demand for higher-yielding assets.

“Some kind of optimism is returning to the market and that’s putting pressure on the yen,” said Lutz Karpowitz, a Frankfurt-based currency strategist at Commerzbank AG, Germany’s second-biggest bank. “The ECB cut is widely expected and we’ll be watching the statement. There could be more upside potential for the euro.”

Japan’s currency depreciated to 99.90 per dollar, the lowest level since Nov. 5, and was at 99.46 yen, from 98.53. It may reach 100 per dollar in the next week and 105 by the end of June, Karpowitz said.

Economic reports suggest the pace of economic decline may be easing and credit markets are showing signs of recovering, curbing demand for the yen as a refuge. U.S. Treasury Secretary Timothy Geithner said yesterday there are “encouraging signs” in markets. American auto sales rebounded from a 27-year low this month, while durable-goods orders and home sales rose in February. Chinese urban investment surged 26.5 percent in the first two months of the year.

Pound’s Gain

The pound rose a third day versus the dollar, to $1.4646 from $1.4468, after Nationwide Building Society said the average cost of a British home climbed 0.9 percent from February, the first increase since October 2007. The U.K. currency reached 90.85 pence per euro, the strongest level since March 9, and was at 91.28 pence.

“The pound is very sensitive to the fortunes of the domestic housing market,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London.

The Bank of England cut its benchmark interest rate to a record low of 0.5 percent last month and started buying assets with newly created money to fight Britain’s first recession since 1991.

Trade Surplus

Australia’s dollar rose to 71.12 U.S. cents from 69.93 cents as optimism the global slowdown may be easing revived demand for the currencies of commodity-exporting nations and the Australian newspaper reported Prime Minister Kevin Rudd plans a third round of economic stimulus in next month’s budget.

The nation’s trade surplus expanded to A$2.11 billion ($1.5 billion) from a revised A$926 million in January, the Bureau of Statistics said in Sydney today. The median estimate of economists surveyed by Bloomberg News was for A$700 million.

“The trade surplus was a surprise on the topside and that gave a boost to the share market and the Aussie dollar,” said Timothy Connors, head of foreign exchange at Custom House Global Foreign Exchange in Sydney. The currency may advance toward 72.50 U.S. cents over the next week, he said.

The MSCI World Index of 23 developed countries climbed 2 percent, bringing its advance since March 9 to 21 percent. The Nikkei 225 Stock Average rose 4.4 percent, and Europe’s Dow Jones Stoxx 600 Index jumped 3.2 percent. U.S. stock futures rose.

G-20 Meeting

The Group of 20 summit convenes in London today to search for a global approach to ending the economic crisis as some reports suggest the pace of economic deterioration is easing. They may agree on boosting financial aid to the International Monetary Fund and to avoid protectionism, according to National Australia Bank Ltd.

“Increased funding for the IMF to support emerging economies in trouble and an anti-protectionist consensus would support sentiment toward the global economy, possibly weighing on the dollar at the margin,” John Kyriakopoulos, Sydney-based head of currency strategy at National Australia Bank Ltd., wrote in a note today.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, declined to 84.899, from 85.503 yesterday.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;