Euro Slumps to Five-Month Low on Reduced Bets for Higher Rates
By Anchalee Worrachate and Stanley White
Aug. 8 (Bloomberg) -- The euro slumped to a five-month low against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.
The euro also fell to a three-week low versus the yen after ECB President Jean-Claude Trichet said economic growth will be ``particularly weak'' through the third quarter and policy makers kept the benchmark rate unchanged yesterday. The South African rand, New Zealand and Australian dollars led losses among the most-traded currencies on speculation central banks will cut borrowing costs. The U.K. pound sank to the weakest in 17 months.
``People in the market are pricing out any chance of European rate hikes,'' said Geoffrey Yu, a currency strategist in London at UBS AG. ``The euro will be struggling to rebound.''
The euro declined 1.3 percent to $1.5119 at 7:41 a.m. in New York and reached $1.5103, the lowest level since Feb. 28, from $1.5325 yesterday. It was the biggest one-day fall since April 24. Against the yen, the European currency traded at 165.91, from 167.70. The dollar gained 0.2 percent to 109.68 versus the yen, from 109.44.
The Russian ruble fell by the most in 2 1/2 years against a dollar-euro basket used by the government after Georgia's Interior Ministry said four Russian fighter-jets entered Georgian airspace and bombed the towns of Gori and Kareli, boosting the risk of war.
Trichet said yesterday he has ``no bias'' or ``pre- commitment'' toward future rate movements after the central bank left the main refinancing rate at 4.25 percent. He told reporters in Frankfurt that while inflation remains a threat, risks to economic growth are ``materializing.''
Rate Bets
European retail sales dropped by the most in at least 13 years in June, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the European Commission said July 30.
Traders pared bets the ECB will lift rates a second time this year after increasing its main rate by a quarter-point to 4.25 percent last month. The implied yield on the December interest rate futures, an indication of expectations, has retreated 19 basis points from the previous meeting, to 4.96 percent today.
``We do not expect a significant recovery in the euro from current levels,'' Ashley Davies, a currency strategist in Singapore at UBS AG, the world's second-largest foreign-exchange trader, wrote in a research note today. ``Trichet delivered fairly standard comments, which were interpreted in a dovish fashion.''
Crude oil, metal and crop prices fell as the dollar climbed, reducing the appeal of commodities as a currency hedge.
The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.
Pound Slumps
The New Zealand dollar slumped as much as 2.2 percent to 69.84 U.S. cents, the biggest loss in two months. It had the second-largest drop among the 16 most-traded currencies, after the rand, as investors added to bets the central bank will cut its 8 percent benchmark rate next month. Australia's dollar dropped 1.7 percent, falling for a fourth day, to 89.10 U.S. cents, from 90.66 cents yesterday. The rand lost 2 percent, falling to 7.6474.
The Reserve Bank of Australia said it may lower borrowing costs, after keeping its benchmark interest rate at a 12-year high of 7.25 percent this week.
The pound fell below $1.93 for the first time since March 2007 as the Bank of England kept its main interest rate steady at 5 percent yesterday after inflation accelerated and the economy teetered on the brink of a recession. It was at $1.9235, from $1.9439. The currency is poised for its biggest weekly drop in three years.
`Losing Heavily'
``Sterling is losing heavily,'' said Hans-Guenter Redeker, the global head of currency in London at BNP Paribas SA, who predicts the pound will fall to $1.70 in the next year. ``You are going to see more days where the pound collapses.''
Singapore's dollar fell the most in two years, contributing to the biggest weekly drop since June 1998, on concern a slowing economy will prompt the central bank to favor a weaker currency.
The local dollar slid 0.7 percent to S$1.40, leading losses among Asian currencies.
The ruble dropped as much as 0.8 percent against the basket, the most since January 2006.
The euro is headed for a fourth weekly decline against the dollar, the worst losing streak since May 2007. The euro weakened to 165.97 yen, from 167.70 yesterday and 167.55 at the end of last week. It reached 166.46 yen, the lowest since July 16.
The U.S. currency headed for its biggest weekly gain against the yen in almost two months as oil slid 19 percent from a July 11 record of $147.27 a barrel. It fell 1.9 percent to $117.71 today.
Commodities Drop
Corn declined 2 percent to $5.31 a bushel, down 33 percent from a record $7.99 on June 27. The Reuters/Jeffries CRB Index of 19 commodities fell 15 percent from its highest on July 3.
``Oil prices have turned out to be much more supportive of the dollar than I expected,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It does temporarily relieve some concern that the U.S. economy will weaken further. This is a plus for sentiment.''
Losses in the yen against the dollar may accelerate on speculation a slowing economy will prevent the Bank of Japan from raising interest rates from 0.5 percent, the lowest among industrialized economies.
Entered a Recession
There is ``a high possibility'' the economy has entered a recession, Shigeru Sugihara, head of business statistics at the Cabinet Office in Tokyo, said on Aug. 6. Gross domestic product shrank an annualized 2.3 percent in the three months ended June 30, according to the median estimate of economists surveyed by Bloomberg. The report is due on Aug. 13.
``Officials confirmed Japan may have entered a recession,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany's second-largest bank. ``This is a catalyst for Japan selling, such as Japanese stocks and the yen. With interest rates low, Japanese investors will keep sending money abroad.''
Two-year German notes were little changed, with the yield at 4.10 percent, a difference with similar-maturity U.S. Treasury notes of 1.64 percentage points, compared with 1.92 points a month ago.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
Last Updated: August 8, 2008 07:47 EDT |
