BLBG: Euro, Pound Tumble on Bets European Central Banks to Cut Rates
By Bo Nielsen
Oct. 22 (Bloomberg) -- The euro fell below $1.28 for the first time since November 2006 and the pound tumbled to a five- year low on speculation European central banks will cut interest rates as the global economy heads for recession.
The single European currency also slid to the weakest in more than four years versus the yen as global stocks declined, reducing demand for higher-yielding assets funded by loans in Japan. The pound declined to a one-week low versus the euro after Bank of England Governor Mervyn King said the U.K. is probably in a recession.
``People now realize that there is a lot of catch-up to be played by the European central banks and from a much higher starting point than in the U.S.,'' said Michael Rosborough, a foreign-exchange strategist at Citigroup Inc. in London.
The euro fell as low as $1.2743 before trading at $1.2916 as of 10:08 a.m. in London, from $1.3063 yesterday in New York. It dropped to 126.95 yen, the lowest since April 2004, and last traded at 127.55 from 103.80. Japan's currency was at 98.77 per dollar from 100.14.
Rosborough forecast the euro will fall to $1.26 in a month, with ``a bias to believing it could go lower than that.''
The pound dropped to $1.6203, the lowest level since September 2003, and traded at $1.6263 from $1.6706. It also declined for a third day against the euro to 78.75 pence from 78.17.
Emerging Markets
Emerging-market currencies weakened as Argentina's planned seizure of private pension funds stoked concern the nation faces its second default this decade. The government of President Cristina Fernandez de Kirchner proposed yesterday to take control of 10 funds, including units of HSBC Holdings Plc and Banco Bilbao Vizcaya Argentaria SA.
Russia's ruble fell for a sixth day against the dollar to the lowest level in two years, dropping as much as 1 percent to 26.9769. The Polish zloty declined 3.4 percent to 2.9150. The South Korean won lost 3.2 percent to 1.363.02. Argentina's peso was little changed yesterday at 3.2190 per dollar, as traders said the central bank sold reserves to shore up the currency.
Hungary's forint fell 0.2 percent to 277.75 per euro even after the central bank unexpectedly raised its key interest rate. The Magyar Nemzeti Bank increased the main rate 3 percentage points to 11.5 percent, the highest level in the European Union, in an attempt to curb the currency's declines.
The euro extended losses today on speculation efforts by global governments and central banks to revive credit markets will fail to avoid a worldwide recession.
Euro `Expensive'
``Expectations for rate cuts in Europe and the U.K. are growing stronger by the day because of the weak economic outlook,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``The euro still looks expensive. Other European currencies are also likely to fall.''
Investors bet the European Central Bank 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 3.15 percent, the lowest level in three years. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year.
The premium traders demand to buy options granting them the right to sell euros against the dollar rose today to the most in at least five years. The currency's one-month 25-delta risk- reversal rate against the dollar widened to minus 1.48 percent, the most since Bloomberg began collecting data in October 2003. The premium is the amount traders demand for euro puts, which allow for sales, over calls, which grant the right to buy.
Dollar Repatriation
The dollar has gained 25 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.
U.S. investors have repatriated about $60 billion of the nearly $1 trillion in foreign stocks and bonds purchased since 2003, leaving an ``enormous pool of capital'' that may flow back into the U.S. and bolster the dollar, according to a Oct. 16 note by Citigroup.
``What is becoming clear is that the steps taken to shore up the capital bases of the major financial institutions and to provide liquidity may well prove successful but those steps in themselves will not stem the appetite for deleveraging further,'' Derek Halpenny, head of currency research at Bank of Tokyo-Mitsubishi in London, wrote in a note to clients today.
BOE Minutes
The British pound fell for a fourth day against the greenback after a report yesterday showed U.K. manufacturing confidence dropped to its weakest level in almost three decades.
``It now seems likely that the U.K. economy is entering a recession,'' BOE Governor King said in a speech to executives in Leeds, England yesterday. ``The balance of risks to inflation in the medium term shifted decisively to the downside.''
Policy makers voted unanimously to lower the benchmark U.K. interest rate by a half point to 4.5 percent in an emergency meeting this month, according to minutes of the Oct. 8 decision released by the Bank of England today in London. The nine-member Monetary Policy Committee said the economy had ``deteriorated substantially,'' which would slow inflation from more than double the 2 percent target.
Citigroup Inc. and UBS AG predict the central bank will cut rates to 4.5 percent when it meets Nov. 6. Barclays Capital forecast that the bank rate will fall to 3 percent by the fourth quarter of 2009.
The pound may weaken toward $1.60, wrote Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, citing weekly and monthly stochastic and trend strength indicators.
Commodity Currencies
The Australian and New Zealand dollars fell after the UBS Bloomberg Constant Maturity Commodity Index yesterday declined toward its lowest level since January 2007 as prices of copper, gold and crude oil dropped. Raw materials account for 60 percent of Australia's exports and 70 percent of New Zealand's.
The Australian dollar weakened 3.9 percent to 66.49 U.S. cents and New Zealand's dollar declined to 59.78 cents.
Traders bet New Zealand's central bank will lower rates by a record 1 percentage point from 7.5 percent tomorrow, according to a Credit Suisse index based on overnight swaps trading.
The yen also rose against all of the major currencies on speculation a slowing global economy will prompt investors to pare holdings of higher-yielding assets funded in Japan.
To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net
