By Ron Harui
May 5 (Bloomberg) -- The euro fell against the dollar and the yen on speculation the European Central Bank will cut interest rates to a record to counter a deepening recession, diminishing the allure of assets in the 16-nation region.
The euro dropped versus 12 of the 16 most-active currencies after the European Commission yesterday said the euro-area economy will shrink 4 percent this year, a contraction twice as deep as projected three months ago. The dollar rose versus 12 of 16 currencies after the Wall Street Journal reported that U.S. regulators will tell 10 lenders to raise more capital, reviving demand for the relative safety of the greenback. Australia’s dollar gained after its central bank left rates unchanged.
“We saw the European governments downgrade their growth forecasts,” said Amy Auster, head of foreign-exchange and international economics research at Australia & New Zealand Banking Group Ltd. in Melbourne. “The ECB will end up still cutting interest rates and probably undertaking some more unorthodox measures. We’ve got a weak outlook for the euro.”
The euro declined to $1.3390 as of 12:52 p.m. in Singapore from $1.3406 in New York yesterday. It earlier reached $1.3438, the highest level since April 6. Europe’s currency also fell to 132.22 yen from 132.45 yen.
The dollar traded at 98.74 yen from 98.80 yen in New York yesterday. The U.S. currency was at $1.5011 per British pound from $1.5018, and bought 1.1269 Swiss francs from 1.1265.
Australian Rates
Gains in the yen were tempered after the Reserve Bank of Australia left interest rates unchanged and said the full impact of its reductions in borrowing costs has yet to be seen.
The RBA left the overnight cash rate target at 3 percent in Sydney today after cutting it by a quarter of a percentage point last month. Eighteen of 19 economists surveyed by Bloomberg forecast today’s decision. Governor Glenn Stevens said last month he is confident that stimulus measures, a strong banking system and a pickup in China will drive a rebound.
Europe’s single currency snapped a two-day winning streak versus the dollar as a Bloomberg survey of economists showed European Central Bank policy makers will lower the benchmark rate by a quarter-percentage point to an all-time low of 1 percent on May 7.
ECB Policy Makers
The 16-nation euro region’s economy will shrink 4 percent in 2009 and 0.1 percent in 2010, the European Commission, the EU executive in Brussels, said yesterday, revising a January estimate for a contraction of 1.9 percent this year.
“The ECB needs a package with a ‘shock and awe’ effect,” wrote UBS AG analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist, in a research note yesterday. “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.”
The dollar was supported after the Wall Street Journal reported, citing several unidentified people, that the 10 U.S. banks which need to raise more capital may include Wells Fargo & Co., Bank of America Corp. and Citigroup Inc.
Wells Fargo would need to increase its capital by $37.4 billion to achieve a 6 percent ratio of Tier 1 capital to total assets, should almost 10 percent of the loans become uncollectible as projected by the bank, analytics firm SNL Financial LLC said in a report completed May 1. SNL said it based its analysis on the adverse economic scenario outlined by regulators and its own stress test.
‘Paring Risk Appetite’
“The WSJ article that banks need more capital is paring risk appetite,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There’s dollar buying.”
The Federal Reserve plans to release results of the stress tests on May 7. The Dollar Index, used by the ICE to track the greenback versus the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, traded at 83.905 from 83.970 yesterday.
“Investors are being cheered by an improving global outlook,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “This backdrop is likely to lead to reduced demand for the dollar and the yen as ‘safe- haven’ currencies.”
Australia’s dollar rose to 74.17 U.S. cents from 74.00 cents in New York yesterday, and bought 73.18 yen from 73.10 yen.
The volume of currency trading will probably be less than normal because of Japan’s “Golden Week” holidays that started yesterday and will end tomorrow, Hampton said.
The MSCI AC Asia Pacific excluding Japan Index of regional shares rose 0.3 percent today and the MSCI World Index climbed 2.8 percent yesterday, erasing its 2009 drop. U.S. pending home resales beat estimates and China’s manufacturing expanded for the first time in nine months, boosting confidence the worst of the global recession may be over.
“PMIs from China to Europe, eastern Europe and Russia all show a positive turnaround,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy, wrote in a research note yesterday. “With risk appetite increasing, traditional funding currencies have come under pressure.”
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net
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