The euro fell for a second day against the dollar on speculation the European Central Bank will lower interest rates to combat a recession. The euro also declined against the Swiss franc after ECB Vice President Lucas Papademos said yesterday further rate cuts may be necessary should inflation keep slowing. The dollar rose against the euro and the British pound as U.S. President-elect Barack Obama crafted a package of infrastructure spending and tax cuts to create 3 million jobs. “Papademos’ comments are pressuring the euro to go lower,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.’s third- biggest bank. “There’s good reason to expect the ECB to loosen monetary policy in the future.” The euro declined to $1.3883 as of 2:25 p.m. in Tokyo from $1.3921 late in New York on Jan. 2. It traded at 127.75 yen from 127.76 yen. The euro declined to 1.4986 Swiss francs from 1.5030. The dollar bought 92.01 yen from 91.83. The pound fell to $1.4469 from $1.4548. The euro may decline to $1.38 in the next few days, Ogawa said. The ECB enters the new year under pressure to cut more deeply amid Europe’s first recession in 15 years, after cutting interest rates by 1.75 percentage points since early October to 2.5 percent. A report scheduled for release next week will probably show inflation fell below the central bank’s target of just below 2 percent in December for the first time since July 2007. The ECB’s next policy decision is due on Jan. 15. ECB Policy “The economic outlook for euro-zone looks bearish and we believe the ECB will need to gradually conform to this view,” Ashley Davies, currency strategist at UBS AG in Singapore, wrote in a research note today. “Further easing by ECB is expected up ahead and we believe recent euro gains will prove hard to sustain.” Obama, who takes office on Jan. 20, plans to seek Congressional approval in coming weeks for an economic stimulus plan that may total $775 billion, according to a Democratic aide. Tax cuts may account for 40 percent of the package. Policy makers should enact “substantial” fiscal stimulus to stop the U.S. economy from deteriorating further, Federal Reserve Bank of San Francisco President Janet Yellen said yesterday. U.S. Policy Last month, the U.S. central bank reduced the target for the federal funds rate, which banks charge one another for overnight loans, to a range from zero to 0.25 percent for the first time. The central bank is also shifting its focus to the amount and type of debt it buys. “Dollar strength has more room to run,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan’s largest brokerage. “There’s a sense of euphoria surrounding Obama’s efforts to boost the economy. This will keep the dollar supported.” The dollar may rise to 94 yen and appreciate to $1.35 versus the euro this week, he said. Japan’s currency gained 29 percent against the euro and 53 percent versus the Australian dollar last year as $1 trillion in losses on mortgage-related securities worldwide prompted Japanese investors to shun higher-yielding overseas assets. The Bank of Japan may consider measures to counter the strengthening yen as the economy faces severe conditions this year, Governor Masaaki Shirakawa said in an interview with public broadcaster NHK yesterday. His comments follow signals last month from Finance Minister Shoichi Nakagawa that Japan was ready to intervene to stem the appreciation. Policy makers try to influence exchange rates by arranging the purchase and sale of foreign currencies. Economic Recovery The dollar, yen and Swiss franc may weaken this year against 2008’s biggest losers in the currency markets as the global economy starts to recover, the largest foreign-exchange strategists and investors say. The winners will be the Brazilian real, Indonesian rupiah and Polish zloty as investors return to higher-yielding assets, according to Bloomberg News surveys. The dollar may strengthen versus the euro and Japanese yen, while dropping against the British pound. “Our strategy for 2009 is to gradually increase risk,” said Maxime Tessier, who manages $151 billion as head of foreign exchange in Montreal at Caisse de Depot et Placement du Quebec, Canada’s largest pension-fund manager. “A year from now, I definitely want to be on the short side on the dollar. We’ll see capital flows out of the U.S. again.” Faster economic growth will cause the dollar to weaken to 2.30 against the real from 2.3145 at the end of 2008, 1 percent versus the rupiah to 11,000 and 2.3 percent to 3.04 per zloty, according to the strategist surveys. To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

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