Euro Falls Versus Dollar, Yen on Speculation ECB Will Cut Rates
Jan. 12 (Bloomberg) -- The euro fell for a second day against the dollar as traders raised bets that the European Central Bank will cut interest rates to the lowest since 2005 at its Jan. 15 meeting.
The currency also dropped to a one-month low versus the yen as Bank of America and Deutsche Bank AG forecast the 16-nation region’s economy will contract 2.5 percent this year. The difference in yield between two-year German and Japanese government bonds narrowed to the least in 18 years, according to data compiled by Bloomberg.
“A large portion of the euro’s demise has been predicated on the view that the ECB is falling behind the curve,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. “The market has priced in a 50 basis-point rate cut from the ECB.”
The euro dropped to $1.3405 as of 10:12 a.m. in Tokyo from $1.3476 late in New York on Jan. 9. The currency also declined to 120.73 yen from 121.81 yen. It touched 120.42 yen, the weakest since Dec. 12. Against the British pound, the euro traded at 88.84 pence from 88.78 pence.
The yen rose to 90.07 per dollar from 90.39 late in New York on Jan. 9. It also climbed to 62.80 against Australia’s dollar from 63.59 and gained to 52.91 versus New Zealand’s dollar from 53.49. It advanced the most against South Korea’s won, rising 1.3 percent to 15.03886.
‘Soft’ Data
Thirteen of the 16 most-active currencies strengthened against the euro as traders increased bets that the ECB will cut its 2.5 percent benchmark interest rate at this week’s meeting. The implied yield on the Eonia forward contract fell to 1.748 percent on Jan. 9 from 1.813 percent on Jan. 8. Eonia is the euro overnight index average.
The difference in yield between Japanese and German two-year notes narrowed to 1.13 percentage points on Jan. 9 from 1.21 percentage points on Jan. 8, the least since 1990.
“The recent run of soft euro-zone data has heightened expectations that the ECB will cut by 50 basis points to 2 percent and concern about the euro-zone outlook will likely keep the euro-dollar defensive early this week,” Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a research note today.
Accelerating job cuts and declining investment may shrink the European economy by 2.5 percent in 2009, according to Bank of America and Deutsche Bank AG. That’s five times the rate of contraction the ECB staff projected last month.
