The euro fell the most in two weeks against the dollar and dropped versus the yen after a European manufacturing report showed the recession is deepening in the 16- nation region. The euro, which yesterday became the currency of Slovakia, headed for its first weekly decline in more than a month on prospects the European Central Bank will cut its key interest rate from 2.5 percent to spur spending. Europe’s PMI index fell to 33.9 in December, below a preliminary estimate of 34.5 and the lowest since the data were introduced in 1998. “The euro zone’s growth outlook is significantly weaker than in the U.S. and that will ultimately weigh on the euro,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France’s biggest bank. “The ECB will realize that it’ll have to cut interest rates to 1 percent in 2009 and that realization will be delivered by poor economic data like today’s PMI report.” The euro declined to $1.3951 as of 10:23 a.m. in London, from $1.4045 late yesterday in New York and $1.4028 at the end of last week. It earlier fell 1.5 percent to $1.3841, the biggest drop since Dec. 19. Europe’s common currency weakened 4.2 percent versus its U.S. counterpart in 2008. The euro fell to 127.14 yen from 127.41 yesterday, after sliding 22 percent last year. The dollar strengthened to 91.14 yen from 90.74 yen, following a 19 percent drop in 2008. Euro Forecasts The European currency will fall to $1.20 by the end of June, Redeker predicted. The euro-region economy will contract 2.5 percent in 2009 while the U.S. economy will shrink 1.8 percent, he forecast. The U.S. dollar strengthened 0.8 percent to $1.4554 against the British pound and gained 0.3 percent to 1.0649 Swiss francs. The South Korean won fell 5 percent to 1,322 per dollar on speculation the authorities in Seoul are scaling back intervention to strengthen the currency. The won’s 15 percent advance in December, the biggest monthly gain in a decade, trimmed last year’s losses to 26 percent. Europe’s PMI index is based on a survey of purchasing managers by Markit Economics and a figure below 50 indicates a contraction. The German index fell to 32.7, below the preliminary estimate of 33.5. “There’s a lot more weakness in Europe ahead,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. The common European currency may fall to $1.20 in the first half of this year and the ECB will cut interest rates to 1 percent by March, Callow said. More Rate Cuts The ECB will lower its key interest rate to 1.5 percent by the second quarter of this year, a Bloomberg survey predicts. The central bank cut the rate by 1.75 percentage points since October, the first reductions since June 2003, after a global credit crisis 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 0.97 percentage point, from 1.09 percentage points two weeks ago, showing growing pessimism about Europe’s economy, data compiled by Bloomberg show. The euro’s 14-day relative strength index versus the dollar climbed above the 70 threshold that signaled its recent gains were excessive on Dec. 15, and by today had fallen back to 59.4, Bloomberg data show. ‘Momentum Funds’ “Momentum funds are buying some dollars,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There are views that the dollar has been oversold.” Dollar gains may be limited as near-zero interest rates in the U.S. damp global demand for the greenback, hampering the government’s efforts to finance stimulus packages, according to DBS Group Holdings Ltd., Southeast Asia’s biggest bank. “You do see a bias returning for a weaker dollar,” said Philip Wee, a senior currency economist at DBS in Singapore. 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 has since risen 0.2 percent to 81.491. The Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time last month and shifted its focus to debt purchases to support the economy. The U.S. budget deficit swelled to $164.4 billion in November, widening for a second month, official figures show. The yen ended a three-day losing streak against Australia’s dollar, advancing 1.1 percent to 63.33. Australia’s 4.25 percent main interest rate compares with 0.1 percent in Japan. The yen was little changed at 52.84 versus New Zealand’s dollar. The yen may strengthen in 2009, after last year advancing against the 16 most-traded currencies, on speculation tighter credit conditions will prompt investors to reduce holdings of higher-yielding assets funded from Japan. “Risk-taking appetite is unlikely to increase so there’s a bias for yen appreciation,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets.

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