Currencies

[thepennyking]

The euro dropped against the dollar and the yen in London on speculation the European Central Bank will this week suggest it's prepared to cut interest rates to prevent an economic recovery from stalling.

German consumer confidence was unchanged this month, a survey from Gfk AG market research showed. ECB President Jean- Claude Trichet said last week that the bank may pare its growth estimates unless consumer spending picks up.

``We anticipate the euro will stay under pressure and wouldn't be surprised to see $1.20 break this week,'' said Steve Barrow, senior currency strategist in London at Bear Stearns Cos. ``An ECB rate cut is coming, it's just a question of timing.''

Against the dollar, the euro fell as low as $1.2045, its weakest since Dec. 4, and was trading at $1.200 as of 9:22 a.m. in London from $1.2118 late Friday in New York, according to EBS prices. Versus the yen, the euro slid as low as 127.27, the lowest since November, from 128.52 and was at 127.67.

A reduction in the ECB's benchmark rate from 2 percent, is unlikely at Thursday's meeting, according to economists surveyed by Bloomberg News. Of 36 polled Thursday and Friday, all but two forecast no change. Eight said they expect a cut by June.

The 12 percent gain in the euro against the dollar in the past year has, in part, been spurred because interest rates in the 12-country region are double those in the U.S. The Federal Reserve this month kept its benchmark rate at 1 percent.

Signals From Trichet

ECB board member Gertrude Tumpel-Gugerell said on Friday that Europe's recovery may be delayed and the bank is ready to pare interest rates if needed.

``Trichet will probably pave the way for a future rate cut at the ECB's press conference,'' said Niels Christensen, a currency strategist in Paris at Societe Generale SA. ``The risks for the euro are to the downside.''

The yen rose to its highest in more than six weeks against the dollar in Europe after the London-based Times newspaper reported Japan will end sales of its currency because the nation's economic recovery is accelerating.

Japan's currency was trading at 105.60 as of 9:23 a.m. in London from 106.02 late on Friday in New York.

The world's second-biggest economy no longer needs a weaker yen to bolster exports, the Times said, citing unidentified Bank of Japan officials. Finance Minister Sadakazu Tanigaki denied the article, calling it ``bold speculation,'' Kyodo News said. The ministry directs the central bank to buy or sell.

Business Confidence

Employment and business confidence reports this week may add to signs of growth after the economy expanded at its fastest annual pace in 13 years last quarter. Signs the economy is recovering has helped push the yen up 14 percent against the dollar in the past 12 months.

Eighty-nine percent of the 70 investors, traders and strategists polled from Tokyo to New York on Friday advised buying or holding the yen against the dollar. Among those who provided a recommendation on the yen versus the euro, a majority said they would buy or hold Japan's currency.

The quarterly Tankan index of business sentiment among large manufacturers, compiled by the BOJ, on Thursday will probably rise to 10, from 7 last quarter, according to a separate survey of economists by Bloomberg News.

``The downward pressure on dollar-yen will persist because the fundamentals remain good, but the move down toward 100 won't be a rapid one,'' said Michael Klawitter, a currency strategist in London at WestLB AG.

Currency Sales

The BOJ sold 10.5 trillion yen in the two months ended Feb. 25, about half of 2003's record annual total. The central bank buys or sells yen at the behest of the Ministry of Finance. A MOF official, speaking on condition of anonymity, declined to comment on the Times report. The ministry determines currency policy, not the Bank of Japan, the official said.

Futures traders halved their bets that the yen will fall against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a drop in the yen compared with those on a gain -- so-called yen net shorts -- fell to about 14,600, from about 31,400 a week earlier.

The ministry will sell yen to prevent it from gaining beyond 105 per dollar after April 1, when most Japanese companies start a new business year, Citigroup Inc. said, citing its own survey.

Of the 57 corporate and investor clients surveyed by the world's biggest financial services company, 79 percent said Japan will try to keep the yen at a certain level after the fiscal year begins. When asked the level, 45.6 percent said 105 is the line the ministry will seek to ``defend,'' Citigroup said.



To contact the reporter on this story:
Richard Blackden in London at [e-mail]

To contact the editor of this story:
Daniel Moss at [e-mail].