By Ron Harui
April 20 (Bloomberg) -- The euro weakened to a one-month low against the dollar and fell against the yen on concern the European economy will deteriorate as central bank officials disagree on the measures needed to combat the recession.
The yen strengthened versus all of the 16 most-active currencies as a decline in Asian stocks spurred investors to reduce holdings of higher-yielding assets. The Dollar Index approached the highest level in three weeks on prospects a U.S. report today will show a gauge of the economy’s direction over the next three to six months improved.
“Investors fear that European policy makers aren’t doing enough to safeguard the economy,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Any sign that the euro zone economy is deteriorating will likely add to the downward pressure on the euro.”
The euro dropped to $1.3002 as of 12:07 p.m. in Tokyo from $1.3044 in New York on April 17. It earlier declined to $1.2967, the lowest level since March 17. Europe’s currency fell to 128.39 yen from 129.33 yen, after touching 128.17, the weakest since March 30.
The yen gained to 98.75 per dollar from 99.16 last week. It advanced to 55.93 versus the New Zealand dollar from 56.32, and climbed to 70.84 versus the Australian currency from 71.64.
Worsening Economy
The euro has weakened against 13 of the 16 most-active currencies this month on signs the recession in the 16-nation region is worsening. Germany’s ZEW Center for European Economic Research in Mannheim may say tomorrow its gauge of current conditions fell to minus 90 in April, the least since September 2003, from 89.4 in March, according to a Bloomberg News survey.
ECB governing council member Miguel Angel Fernandez Ordonez will speak in Madrid tomorrow, and vice-president Lucas Papademos will speak in Strasbourg, France on the same day.
“There are cleavages on the unwieldy decision-making ECB governing council,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. “The market sees the apparent disunity as a reason to sell the euro.”
ECB council member Axel Weber said last week the bank shouldn’t cut rates below 1 percent, putting him at odds with policy makers who say borrowing costs can fall below that threshold. Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have indicated they may support cutting the target rate below 1 percent and buying debt to pump money into the economy, a policy known as quantitative easing.
The ECB will lower its benchmark rate by a quarter- percentage point on May 7, according to a Bloomberg News survey of economists.
Yen Gains
The yen rose for a third day against the euro as concern the global recession will worsen helped push Asian stocks lower.
“Worries that Europe’s response to its recession is lagging behind other countries is causing risk aversion,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The yen is being bought and may strengthen” to 128.27 per euro and 98.80 against the dollar today, he said.
Japan’s Nikkei 225 Stock Average fell 1 percent and the MSCI Asia-Pacific Index of regional shares slipped 0.6 percent.
The Dollar Index climbed for a fifth day, its longest run of gains since January, before the Conference Board releases its index of leading U.S. economic indicators today. The index fell 0.2 percent in March, after dropping 0.4 percent in February, according to a Bloomberg survey of economists.
President Barack Obama said yesterday that he’ll demand “accountability” from any U.S. banks that require additional taxpayer money following “stress tests” being conducted by regulators. The tests are being used to determine whether the companies have enough capital to cover losses over the next two years should the economic downturn worsen.
‘Fast and Comprehensive’
“The policies being taken by the Obama administration are fast and comprehensive and there are signs the recession there is waning,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This is positive for the dollar.”
The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, rose to 86.148 from 85.981.
Gains in the yen may be tempered after the JPMorgan Chase & Co. benchmark index of investor expectations for currency swings dropped to a six-month low of 14.4 percent on April 17.
Lower currency volatility indicates smaller exchange-rate fluctuations that can erode profit on so-called carry trades. This strategy involves borrowing funds in countries with lower interest costs, such as Japan, and investing them in those with higher rates, allowing investors to pocket the difference.
‘Volatility Spike’
“Big currency moves are behind us,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, with C$120 billion ($98.6 billion) in assets. “The volatility spike has to unwind itself over time. Selling volatility has been the winning trade so far this year and will continue to work well.”
The benchmark interest rate is 0.1 percent in Japan and as low as zero in the U.S., compared with 3 percent in Australia and in New Zealand.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.
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