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Euro Declines Against Dollar, Yen on Concern Recession Deepened

Jan. 2 (Bloomberg) -- The euro fell the most in two weeks against the dollar and slid versus the yen before a European manufacturing report today that will probably show a recession is deepening in the 16-nation region.

The euro headed for its first weekly decline in a month on prospects the European Central Bank will lower interest rates to revive economic growth. The central bank cut its benchmark interest rate by 1.75 percentage points since October to 2.50 percent, the first reductions since June 2003.

“There’s a lot more weakness in Europe ahead,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “We’ve got them cutting to 1 percent by March.”

The euro declined to $1.3919 as of 10:49 a.m. in Singapore from $1.4045 late yesterday in New York and $1.4028 at the end of last week. It dropped 4.2 percent in 2008. The currency also fell to 126.53 yen from 127.41 yen, after sliding 22 percent in 2008. The euro may weaken to $1.20 in the first half of this year, Callow said.

The dollar traded at 90.91 yen from 90.74 yen. It declined 19 percent last year, the most since 1987. The U.S. currency strengthened 0.1 percent to $1.4657 against the British pound and 0.7 percent to 1.0696 versus the Swiss franc.

Europe’s manufacturing index was 34.5 in December, unchanged from a preliminary estimate and the lowest since the data was introduced in 1998, according to economists surveyed by Bloomberg News. The index is based on a survey of purchasing managers by Markit Economics and a figure below 50 indicates contraction. The report will be released at 9 a.m. in London.

European Rate Cuts

The ECB will lower its key interest rate to 1.5 percent by the second quarter of this year, a separate Bloomberg survey showed. Policy makers are cutting borrowing costs to spur spending after a seizure in global credit markets helped trigger the euro region’s first recession in 15 years.

The yield advantage of two-year German bunds over similar- maturity Treasuries narrowed to 0.99 percentage point from 1.09 percentage point two weeks ago.

Dollar gains may be limited as near-zero interest rates in the U.S. damp global demand for the greenback, hampering government efforts to finance stimulus packages in the world’s biggest economy, according to DBS Group Holdings Ltd., Southeast Asia’s biggest bank. The Federal Reserve last month cut its key rate to between zero and 0.25 percent to spur spending.

Weaker Dollar

“It’s zero interest rates and the budget deficit is growing,” said Philip Wee, a senior currency economist at DBS in Singapore, in an interview with Bloomberg News. “You do see a bias returning for a weaker dollar.”

The ICE’s Dollar Index, which tracks the U.S. currency against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona dropped 6 percent in December, the first monthly decline since June. It’s since risen 0.1 percent to 81.395.

The Federal Reserve cut its benchmark interest rate last month to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to support the economy.

The U.S. budget deficit swelled to $164.4 billion in November, the Treasury Department reported on Dec. 10, the second month it widened. Treasury Assistant Secretary Karthik Ramanathan on the same day cited private analysts’ estimates of borrowing needs that may reach as much as $2 trillion in the fiscal year that ends September 2009.

To contact the reporters on this story: Ron Harui in Singapore at [e-mail]

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