Euro Retreats From 14-Month High; Officials May Warn on Gains

By Yasuhiko Seki and Ron Harui

Oct. 21 (Bloomberg) -- The euro was little changed against the dollar, retreating from the strongest level in 14 months, as some investors bet European policy makers will say they are concerned its strength may harm the region’s economic recovery.

The euro also snapped nine days of gains against the yen before speeches by French President Nicolas Sarkozy and European Commission President Jose Barroso. New Zealand’s dollar rose against the 16 most-traded currencies tracked by Bloomberg after central bank Governor Alan Bollard said its advance isn’t an obstacle to raising interest rates. The pound rose as Bank of England Governor Mervyn King said Britons should take “into account” a possible rate increase.

“European officials are expressing worry that the euro’s appreciation is making things difficult for their economy,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is causing the euro to undergo a downward correction.”

The euro was $1.4939 as of 7:43 a.m. in London from $1.4945 yesterday in New York, when it advanced to $1.4994, the highest level since August 2008. The euro declined to 135.46 yen from 135.66 yen. The dollar was at 90.68 yen from 90.78 yen.

New Zealand’s dollar was at 75.35 U.S. cents, from 74.96 cents yesterday, after earlier falling as much as 0.4 percent. It climbed to 75.76 yesterday, the strongest level since July 2008. The pound rose to $1.6411 from $1.6382.

‘Excessive Volatility’

The euro has strengthened 15 percent versus the dollar in the past six months, making the region’s exports more expensive to overseas buyers. European Central Bank President Jean-Claude Trichet said on Oct. 19 that “excessive volatility” in currencies is “bad for economic development.”

Sarkozy will hold a weekly cabinet meeting at 10 a.m. in Paris and European Commission President Barroso will speak to the European Parliament at 9 a.m. in Strasbourg, France.

The New Zealand dollar reversed losses after Radio New Zealand reported that Bollard told parliament the currency’s gains are being driven by a weak U.S. dollar and money markets. As recently as Sept. 10, he said he didn’t expect to raise interest rates until “the latter part of 2010.”

Traders are betting New Zealand’s central bank will boost its key rate by 2 percentage points over 12 months, according to a Credit Suisse Group AG index based on swaps.

Benchmark Rates

Benchmark interest rates are 2.5 percent in New Zealand and 3.25 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The pound gained after King wrote in an article for Scotland’s Herald newspaper that interest rates are “extremely low,” and Britons should prepare for increases “at some point.”

“I never thought King would talk about a rate increase,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “King’s unexpected comments triggered buying of the pound.”

South Korea’s won slumped on concern the government will intervene to counter gains that may hamper exports.

Finance Minister Yoon Jeung Hyun said today he is “concerned” by the decline in retail and manufacturing jobs during the economic recovery. The Bank of Korea said last week it will curb volatility and “excessive herd behavior” in the nation’s currency.

The won dropped 1.1 percent to 1,179.10 per dollar, the biggest decline since Aug. 17. The won has risen 5.9 percent versus the dollar in the past three months, Asia’s second-best performer in the period.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.