Euro Falls as Central Bank May Take More Action to Stem Slump

By Ron Harui and Ye Xie

May 6 (Bloomberg) -- The euro fell against the dollar and the yen on speculation the European Central bank may seek to expand access to credit tomorrow to revive economic growth after producer prices fell in March by the most in 22 years.

The pound rose yesterday to the highest level against the dollar in almost four months as the drop in the U.K. commercial property market slowed. Demand for the dollar may wane after Federal Reserve Chairman Ben S. Bernanke said the U.S. economic contraction may be easing, reducing the allure of the greenback as a refuge from the global financial crisis.

“The ECB will at least announce something unusual,” said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney. “In terms of policy measures, they’ll be discussing the types of measures that would potentially weaken the euro.”

The euro slid to $1.3287 as of 7:41 a.m. in Singapore from $1.3330 in New York yesterday. Europe’s single currency weakened to 131.26 yen from 131.73 yen. The dollar bought 98.80 yen from 98.82 yen and was at 1.1354 Swiss francs from 1.1322 francs.

The volume of foreign-exchange trading will likely be less than normal because of Japan’s “Golden Week” holiday today, Callow said.

The pound traded at $1.5034 from $1.5090 in New York yesterday, when it reached $1.5162, the highest level since Jan. 9, after the Royal Institution of Chartered Surveyors said the rate of decrease in demand for U.K. office and retail space slowed in the first quarter, adding to speculation the recession may be waning.

The ECB will probably lower the benchmark rate by a quarter-percentage point to 1 percent tomorrow, according to a Bloomberg survey of economists. That would be the lowest level since the bank took charge of monetary policy in 1999.

‘Shock and Awe’

Central bank President Jean-Claude Trichet declined in recent weeks to comment on what steps other than rate cuts policy makers may take to stem the recession.

“The ECB needs a package with a ‘shock and awe’ effect,” UBS AG analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist, wrote in a research note on May 4. “A token or tame step, which some still expect, would add very little value to policy. We continue to see the euro-dollar at $1.30 in one month.”

Wholesale prices in the 16-nation euro region fell 3.1 percent in March from a year earlier, after a 1.7 percent drop in the previous month, the European Union’s statistics office said in Luxembourg yesterday. That was the biggest decline since February 1987.

Demand for the dollar may weaken as Bernanke’s remarks before the congressional Joint Economic Committee echoed last week’s central bank statement that the outlook has “improved modestly” since March.

The Dollar Index, used by the ICE to track the greenback versus the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, rose 0.2 percent to 84.157 yesterday.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net