BLBG: Euro Falls to Two-Week Low as European Manufacturing Shrinks
The euro fell to a two-week low against the dollar and declined versus the yen after a European manufacturing report indicated the recession is deepening in the 16-nation region.
The euro, which became the currency of Slovakia yesterday, headed for its first weekly decline in more than a month on prospects the European Central Bank will cut its target lending rate from 2.5 percent to spur spending. The pound approached the lowest in almost seven years against the dollar as U.K. mortgage approvals slid to the weakest level since at least 1999.
“Europe is having more dismal data, and that’s why the euro is giving up its recent gains,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets. “The European economy will follow the same path of the U.S., and the ECB may join the other central banks to have a zero interest-rate policy.”
The euro declined 1 percent to $1.3906 at 9:30 a.m. in New York, from $1.4045 yesterday. It touched $1.3841, the lowest level since Dec. 19. The currency may fall to $1.30 in six months, according to Watt. Europe’s currency fell 0.5 percent to 126.75 yen from 127.41, after sliding 22 percent last year. The dollar rose 0.5 percent to 91.16 yen from 90.74, following a 19 percent drop in 2008.
Sterling depreciated 1.2 percent to $1.4502 against the dollar and 0.2 percent to 95.89 pence per euro. Lenders granted 27,000 loans for house purchase in November, down from 31,000 in the prior month, the Bank of England said today. The pound fell to $1.4354 on Dec. 31, the weakest level since April 2002.
European Factories
An index of European manufacturing, based on a survey of purchasing managers by Markit Economics, fell to 33.9 in December, the lowest level since the start of the data in 1998. A reading below 50 indicates a contraction. A German index fell to 32.7, below the preliminary estimate of 33.5.
The euro gained 11 percent versus the dollar last month, and reached record highs versus the pound, the Norwegian krone, and the Swedish krona. The euro’s effective exchange rate, which the ECB uses to track its value against the currencies of 24 major trading partners, reached an all-time high of 117.77 on Dec. 18.
The currency’s recent gain may “prove unsustainable given the negative implications renewed euro strength is likely to have on the euro-zone economic growth outlook,” wrote Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London, in a note to clients today. “A return to more normal liquidity conditions in January will signal a partial reversal of recent euro strength.”
ECB’s Rate
The ECB will lower its main refinancing 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, indicating concern Europe’s economy will weaken further, data compiled by Bloomberg show.
The euro’s 14-day relative strength index versus the dollar climbed above the 70 threshold in mid-December, signaling its recent gains were hard to sustain, and fell to 58.59 today, Bloomberg data show.
“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
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 rose 0.3 percent to 81.557 today.
The Institute for Supply Management’s U.S. factory index fell to 35.4 in December, the lowest since 1980, from 36.2 the prior month, according to the median forecast of 57 economists surveyed by Bloomberg News. A reading less than 50 signals manufacturing contracted. The report is due at 10 a.m. New York time.
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, official figures show.
