By Oliver Biggadike
April 17 (Bloomberg) -- The euro may extend its decline against the yen after falling to the lowest level this month on speculation policy disagreement among the region’s central bankers will undermine efforts to end the recession.
The dollar pared its gain versus the euro yesterday as manufacturing in the Philadelphia region contracted less than forecast and JPMorgan Chase & Co.’s profit exceeded analysts’ estimates, reducing demand for safety. South Africa’s rand was the best performer among major currencies on bets the central bank will keep cutting borrowing costs to revive growth.
“Markets don’t trust the euro,” said Mike Moran, a senior currency strategist at Standard Chartered Bank in New York. “The euro has just struggled, and that reflects the markets’ distrust of the European outlook.” The currency will probably fall below the “critical” level of $1.3110 in a month, he said.
The euro traded at 130.95 against the yen at 6:35 a.m. in Tokyo, after depreciating yesterday as much as 1.6 percent to 129.37, the lowest level since March 31. Japan’s currency was little changed at 99.37 against the dollar.
South Africa’s rand appreciated as much as 2.6 percent to 8.8775 versus the dollar, the strongest level since Oct. 14, on speculation an unexpected drop in retail sales in February bolstered the case for the central bank to lower its 9.5 percent target lending rate.
Dollar Loses Momentum
The dollar lost momentum versus the euro yesterday as a report from the Federal Reserve Bank of Philadelphia showed the region’s manufacturing shrank at a slower pace in April. The general economic index climbed to minus 24.4 this month from minus 35 in March, the bank said. Negative numbers indicate contraction. A reading of minus 32 was forecast by analysts.
JPMorgan, the second-largest U.S. bank by assets, said earnings fell in the first quarter to $2.14 billion, or 40 cents a share, exceeding analysts’ average estimate of 32 cents.
The European Central Bank is due to announce on May 7 whether it will follow counterparts in the U.S. and U.K. in pumping money into the economy by purchasing assets.
ECB council member Axel Weber said on April 15 the bank shouldn’t cut interest rates below 1 percent, putting him at odds with policy makers who say borrowing costs must fall close to zero.
“We’re in a world where you need aggressive policy action on many fronts, and that’s the Achilles’ heel of the euro,” said Richard Franulovich, a currency strategist at Westpac Banking Corp. in New York. The 16-nation currency will probably drop to $1.25 in three months, Franulovich predicted.
ECB Policy Makers
Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have indicated they may support cutting the 1.25 percent target rate below 1 percent and purchasing debt securities to pump money into the economy. Austria’s Ewald Nowotny has said debt purchases would be “sensible” and the debate on how low to cut the benchmark rate is still open.
The Organization for Economic Cooperation and Development forecast on March 31 that Europe’s economy would shrink 4.1 percent this year, compared with 4 percent in the U.S.
Industrial production in the euro region sank 18.4 percent in February from a year earlier, the biggest decline since the data series began in 1986, the European Union’s statistics office said yesterday.
The pound fell 0.5 percent to $1.4925 yesterday after a three-day gain. Sterling rallied as high as $1.50 on April 15 for the first time in three months on evidence the nation’s housing slump eased.
To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net
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