By Ye Xie and Agnes Lovasz Oct. 21 (Bloomberg) -- The dollar rose to a 19-month high against the euro on bets the European Central Bank will cut interest rates at a faster pace than the Federal Reserve. Canada's dollar fell to the lowest against the greenback since August 2005 after the central bank lowered its main lending rate. The Australian currency dropped as policy makers signaled they may cut borrowing further. The yen climbed to near a three-year high against the euro on bets reduced rates will lead investors to sell higher-yielding assets. ``The element of risk aversion helps the dollar and the yen, which has been the trend for a while,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. ``The convergence of interest rates will overtake the risk aversion element to become the most important support for the dollar going forward.'' The dollar rose 1.8 percent to $1.3110 per euro at 11:58 a.m. in New York, from $1.3344 yesterday. It touched $1.3105, the strongest level since March 2007. The yen appreciated 3.1 percent to 131.68 per euro, from 135.92. It touched 132.24 on Oct. 10, the strongest level since June 2005. The yen advanced 1.4 percent to 100.42 per dollar from 101.86. Canada's currency dropped as much as 2.5 percent to C$1.2208 per U.S. dollar after the Bank of Canada reduced its benchmark interest rate by a quarter-percentage point to 2.25 percent. Policy makers said in a statement that ``some further monetary stimulus will likely be required.'' Australian Rate The Australian dollar fell 2.6 percent to 68.63 U.S. cents as minutes of the Reserve Bank's Oct. 7 meeting showed policy makers said inflation will slow at a faster rate than previously expected as the economy slows, fueling expectations for another cut. They lowered the rate at this month's meeting by 1 percentage point, the most since 1992, to 6 percent. Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, said yesterday it may lose as much as HK$15.5 billion ($2 billion) on unauthorized currency contracts that went sour as the Australian dollar declined. The currency has plunged 28 percent since June 30 against the U.S. dollar, the most among the 16 most-active currencies. Brazil's real slid 3.2 percent to 2.1850 per dollar and South Africa's rand dropped 2.9 percent to 10.4825 per dollar as concern the global economy will fall into a recession led investors to sell emerging-market currencies. Yen vs. Real Japan's yen rose 3.6 percent to 46.41 versus the Brazilian real and 2 percent to 62.24 per New Zealand dollar on bets investors will unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target rate compares with 13.75 percent in Brazil and 7.5 percent in New Zealand. Investors bet the ECB will lower borrowing costs by another 0.75 percentage point by June after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8, part of coordinated reductions by major central banks. The implied yield on the three-month Euribor contract expiring in June fell to 3.25 percent, the lowest level since January 2006. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year. The Fed will cut its 1.5 percent target rate by at least a quarter- percentage point at its Oct. 29 policy meeting, futures on the Chicago Board of Trade indicate. `Economic Fallout' ``The economic fallout of the crisis will lead to more aggressive policy actions in major countries,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``The yen and the dollar will be the beneficiaries.'' The euro will depreciate to $1.26 in eight weeks, said Fitzpatrick, adding he's recommending clients buy the dollar and the yen ``pretty much against everything.'' The currency shared by 15 European countries fell to its lowest level against the dollar since March 2007 after ECB Executive Board member Juergen Stark said in an interview with the radio station Deutschlandfunk that he sees risk for one or two more ``accidents'' in financial markets. The dollar has gained 18 percent since touching a record low of $1.6038 per euro on July 15 on speculation the U.S. currency will benefit as the European economy slows. The U.S. currency's advance against the euro accelerated after stop losses on investors' long positions on the euro were activated when $1.3260 was broken, said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank. A stop loss is an automatic order to buy or sell an asset should it reach a particular level. Praefcke expects the dollar to trade at $1.34 per euro at year-end and to strengthen to $1.25 by the end of 2009. That compares with a median forecast of $1.40 and $1.33 in a survey of 32 analysts surveyed by Bloomberg News. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

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