By Jamie McGee and Michael J. Moore Dec. 19 (Bloomberg) -- The dollar advanced the most against the euro in almost two months as traders said the decline after the Federal Reserve lowered interest rates to near zero this week was too fast to be sustained. The euro also weakened after the European Commission said the region may suffer a “substantial” effect from the financial crisis next year. The yen traded near a 13-year high against the dollar even after the Bank of Japan lowered its benchmark interest rate to 0.1 percent. “This was the most concentrated, rapid rally in the euro since its creation,” said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. “The market got a little ahead of itself in the short run. We are getting a healthy correction now.” The dollar climbed 2.2 percent to $1.3930 versus the euro at 9:48 a.m. in New York, from $1.4240 yesterday, when it slumped to a 12-week low of $1.4719. The U.S. currency gained as much as 2.4 percent today, the biggest intraday increase since Oct. 24. The euro fell 2.1 percent to 124.72 yen from 127.44. The dollar traded at 89.46 yen, compared with 89.43. It dropped to 87.14 yen on Dec. 17, the lowest level since 1995. The U.S. currency declined 4.3 percent against the euro this week after the Fed lowered its target lending rate on Dec. 16 to a range of zero to 0.25 percent. The Fed reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying Treasuries. Relative Strength The nine-day relative strength index of the dollar versus the euro, a comparison of the magnitude of gains and losses, was at 21.44 yesterday, below the level of 30 that signals a change in direction may be imminent. “This is not a fundamentally driven move in the euro,” said Lutz Karpowitz, a Frankfurt-based currency strategist at Commerzbank AG. “We have very low liquidity right now, and volatility is very high.” Implied volatility on one-month euro-dollar options averaged 23.2375 this week, about double the year-to-date average. Ukraine’s currency jumped 10 percent to 8.2750 per dollar against the dollar after the central bank increased its refinancing rates for the second time in two days after the currency fell as much as 16 percent in the past two days. The euro slid against the dollar after the European Commission said in a report there may be a “sharp” decline in regional economic growth next year. ‘Drag’ on Growth “Downsizing of banks’ balance sheets should exert a significant drag on economic growth,” said the Brussels-based commission, the European Union’s executive branch, in a report today. “Together with the marked deterioration in the global economy, this paves the way for a sharp cyclical downturn in the euro area.” German producer prices dropped last month the most since records began in 1949, reducing inflation as a potential impediment to central bank rate cuts. Prices fell 1.5 percent from October, when they were unchanged, the Federal Statistics Office said today in Wiesbaden. The yen gained 25 percent against the dollar this year, the most since 1987, as more than $1 trillion of credit-market losses and a global economic slowdown encouraged Japanese investors to unwind overseas investments and bring money home. Japan’s currency appreciated 1.8 percent this week in its seventh straight advance, the longest rally in four years. “There’s still a flight to liquid, safe currencies, and it would take a significant amount of intervention to stop that trend,” said Geoff Kendrick, a senior foreign-exchange strategist at UBS AG in London. Honda on Yen Honda Motor Co. may shift research and development out of Japan and increase overseas manufacturing if the yen strengthens further, President Takeo Fukui said in an interview with journalists today. “We would need to reduce our domestic capacity if the yen constantly trades below 90 yen against the dollar,” he said. “We may end up importing complete products.” Finance Minister Shoichi Nakagawa said this week at a news conference in Tokyo that he has “the means” to limit the yen’s rally. Central banks buy or sell currencies when they seek to influence exchange rates. The last time Japan intervened on its own, it sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen strengthened to 103.42 per dollar. Japan hasn’t bought yen since 1998, when it spent 3.05 trillion yen as the currency reached a low of 147.66. The BOJ said today it will raise monthly government bond purchases to 1.4 trillion yen ($15.7 billion) from 1.2 trillion yen to increase liquidity in the financial system. The reduction in the overnight lending rate was predicted by futures traders after the Fed slashed rate this week. To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

Source