Bloomberg News

Currency ‘Ugly Contest’ Signals Euro to Weaken: Chart of the Day

September 14, 2011

Sept. 15 (Bloomberg) -- The euro may win the “ugly contest” and drop against the dollar, as Europe’s debt crisis makes the region more likely to fall into an economic recession than the U.S., according to Westpac Banking Corp.

The CHART OF THE DAY shows the euro dropped this week to the lowest since February as the yield premium of two-year European bonds over U.S. counterparts narrowed to the least in eight months. Also tracked is a Credit Suisse Group AG index of traders’ bets on how much the European Central Bank will change its benchmark interest rate over the next 12 months. The gauge last week showed expectations for the biggest cut in 2 1/2 years, at 34 basis points, or 0.34 percentage point.

“From a relative growth perspective, the U.S. will have more momentum than Europe,” said Westpac’s Jonathan Cavenagh, a Singapore-based currency strategist. “It is an ugly contest and the U.S. dollar was winning it for much of this year, but the momentum has definitely swung back in euro’s favor.”

The last time traders predicted bigger rate cuts than 34 basis points was in March 2009, amid a global recession, when the euro weakened to $1.2481 and the spread between European and U.S. two-year bond yields was at 29 basis points. The euro dropped to $1.3495 on Sept. 12, a seven-month low. The spread between two-year European and Treasury yields reached 22 basis points on Sept. 9, the least since Jan. 5.

The ECB cut its 2011 growth forecast to 1.6 percent from 1.9 percent, and for 2012 to 1.3 percent from 1.7 percent at this month’s meeting. Policy makers left the main refinancing rate unchanged at 1.5 percent, having already raised it twice by 0.25 percentage point this year.

The so-called shadow ECB council, a group of 15 economists and portfolio managers who watch developments and policy in the region and issue recommendations, has said the central bank should reverse direction and cut borrowing costs to prevent the euro-area economy from slipping back into recession.

--With assistance from Garfield Reynolds in Sydney. Editors: Lee Miller, Rocky Swift

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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