Bloomberg News

Euro Drops as Prospects Dim for ECB Rate Increases; Yen Advances

August 30, 2011

Aug. 30 (Bloomberg) -- The euro weakened against most major counterparts on speculation the European Central Bank has finished raising interest rates as the region’s sovereign-debt crisis curbs economic growth.

The yen rose versus 12 of its 16 most-traded peers as U.S. consumer confidence slid to the lowest level since April 2009, adding to demand for safer currencies. Minutes of the last Federal Reserve meeting showed a few policy makers favored more aggressive action to stimulate the U.S. economy. The euro fell for the first time in three days versus the dollar before the ECB meets next week.

“It’s going to be very, very difficult for the ECB to hike rates any time in the next six to nine months,” said Greg Salvaggio, senior vice president of capital markets in Washington at the currency-trading firm Tempus Consulting Inc. “There’s still the overhang of what’s going to happen with European sovereign debt.”

The euro fell 0.5 percent to $1.4441 at 5 p.m. in New York and dropped 0.6 percent to 110.82 yen. The yen gained 0.1 percent to 76.74 per dollar. The Swiss franc declined 0.5 percent to 82.01 centimes per dollar.

Europe’s shared currency was little changed over the past week versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. New Zealand’s dollar rose 3 percent in the best performance. Norway’s krone gained 1.2 percent, while the franc dropped the most, 3.6 percent.

‘More Substantial Move’

Minutes of the Federal Open Market Committee’s Aug. 9 meeting released today showed some policy makers, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge that was adopted to hold the key interest rate at a record low until mid-2013.

The report indicates Fed officials will debate their options more fully when they meet next month for a two-day session originally scheduled to last one day. Officials at the Aug. 9 meeting discussed a range of tools, including buying more government bonds, to bolster the economy, the minutes showed.

U.S. stocks fell earlier as the Conference Board’s index of consumer confidence slumped to 44.5 this month, from a revised 59.2 reading in July, figures from the New York-based private research group showed. The Standard & Poor’s 500 Index tumbled as much as 1.2 percent before ending the day up 0.2 percent.

“We’re going to see a lot of the risk-off trades come back into the picture during the rest of the week,” said Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc in Stamford, Connecticut. “We continue to see euro-dollar move with equity prices and risk in general.”

Rate-Cut Bets

A Credit Suisse AG index showed traders are betting the ECB will cut its key rate by 16 basis points, or 0.16 percentage point, in the next 12 months. A month ago, they wagered it would raise rates by 22 basis points.

The ECB is scheduled to meet on rates Sept. 8.

“Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September,” ECB President Jean-Claude Trichet told the European Parliament’s economic panel yesterday in Brussels. The comment contrasted with his policy statement on Aug. 4, when he said risks to the inflation outlook were “on the upside.”

The central bank has raised its benchmark interest rate twice this year, to 1.5 percent, to curb above-target inflation.

“We no longer expect the ECB to hike rates this year,” said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA in London. “That means the euro is likely to receive less interest-rate support than previously anticipated.”

European Confidence

The euro extended losses after the European Commission in Brussels said an index of executive and consumer sentiment in the single-currency region fell to 98.3 in August from a revised 103 in July. That’s the lowest since May 2010.

The euro region’s economy expanded in the second quarter by 0.2 percent, the least since 2009. Italian bonds fell for a seventh day today, the longest streak of declines since February, after investors bid for 1.27 times the amount on offer at a sale of 10-year bonds. That compared with a bid-to-cover ratio of 1.38 at the auction of comparable debt July 28.

New Zealand’s dollar rose to the highest level in almost a month versus the U.S. dollar as data showed home-building permits in the nation rose in July by the most since April 2008.

“Slightly Better Position’

“The recovery from the earthquake is now beginning to feed more noticeably into the data,” said Robert Lynch, head of currency strategy for HSBC Holdings Plc in New York. “To the extent that the earthquake in New Zealand had caused the RBNZ to cut rates this year and they are now rebounding from that, they may be in a slightly better position than some of the other commodity-producing currencies.”

The Reserve Bank of New Zealand cut its benchmark interest rate by 0.5 percent to 2.5 percent in March after an earthquake in February.

The kiwi, as the currency is known, climbed 0.8 percent to 85.31 U.S. cents and reached 85.59, the highest since Aug. 4.

Sweden’s krona was the worst performer among major currencies amid speculation that slowing economic growth will deter the central bank from raising interest rates. The government last week cut its 2011 growth forecast to 4.1 percent from 4.6 percent.

The krona depreciated 0.5 percent versus the euro to 9.1803 and weakened 1 percent to 6.3572 per dollar.

South Africa’s rand fell against the dollar for the first time in four days after data showed the nation’s economy grew in the second quarter at the slowest pace in almost two years, an annualized 1.3 percent. The rand declined 0.3 percent to 7.0709.

--With assistance from Garth Theunissen in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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