The euro fell to a three-week low against the dollar and dropped versus the yen on speculation slowing inflation will give the European Central Bank scope to lower interest rates further. The euro declined against 15 of 16 major currencies monitored by Bloomberg. Derivatives trading showed investors are betting the ECB will cut interest rates by at least 25 basis points next week. The dollar advanced against yen, the Swiss franc and the Swedish krona after U.S. President-elect Barack Obama was said to favor an economic stimulus package of about $775 billion. “The euro hasn’t had the best start in 2009,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. “An awful lot of interest-rate indicators for the euro zone seem to suggest the ECB is going to cut rates aggressively amid signs that the region’s economic outlook is no better than that of the U.K. or the U.S. The market is building in a little too much in terms of rate-cut expectations.” The euro fell to $1.3393, the lowest level since Dec. 15, and traded at $1.3401 at 10:02 a.m. in London, from $1.3635 yesterday in New York. The euro declined to 125.70 yen, from 127.31 yen. The dollar was at 93.77 yen, from 93.44 yen. It earlier rose to 93.83 yen, the highest level since Dec. 8. The U.S. currency climbed 0.6 percent to 1.1157 Swiss francs. Against the Swedish krona, the greenback rose to 7.9424, from 7.8574. It also appreciated to 58.57 U.S. cents per New Zealand dollar, from 59.05. Inflation Report Inflation in the euro area slowed to 1.6 percent last month, the European Union’s statistics office in Luxembourg said today. That was less than the 1.8 percent predicted in a median forecast of 28 economists surveyed by Bloomberg. The rate fell to 2.1 percent in November from 3.2 percent the previous month, the biggest reduction since at least 1991. “Poor economic fundamentals in euroland warrant further rate cuts from the ECB,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The interest-rate differential is moving in favor of the dollar again.” The euro may fall to $1.30 in three months, Upadhyaya said. The ECB cut interest rates by 1.75 percentage points since early October to 2.5 percent as the region entered a recession. Policy makers will lower the main rate by at least 25 basis points at the next meeting on Jan. 15, according to a Credit Suisse Group AG gauge of probability, based on overnight index-swap rates. Prepared to Cut ECB council member Vitor Constancio said policy makers are prepared to cut interest rates if necessary to keep inflation on target. He said in a speech in Lisbon yesterday that if price growth slows too much below the central bank’s goal of just below 2 percent “we can be certain that European monetary policy will respond with interest-rate reductions.” Obama told House Speaker Nancy Pelosi yesterday that he favors a U.S. economic stimulus plan of about $775 billion, a Democratic aide said. The president-elect, who is due to deliver a speech on the economy on Jan. 8, met with congressional leaders from both parties at the Capitol to help win support for a two-year plan to tackle the nation’s recession. “I am very bullish on the dollar throughout 2009,” Matt Esteve, a foreign-exchange trader at currency-trading firm Tempus Consulting Inc. in Washington, said in an interview on Bloomberg Television. “It’s because the U.S. economy is best set for recovery in 2009.” The dollar will advance to $1.10 per euro and 110 yen by year-end, according to Esteve. Yen Gains The yen advanced to 66.55 per Australian dollar from 66.97 late yesterday in New York. The yen pared yesterday’s 2.5 percent decline against the currency on speculation Japanese investors and exporters repatriated overseas earnings. The yen’s real effective exchange rate, a measure of its value against the currencies of 15 of Japan’s trading partners after adjustment for inflation, rose 5.1 percent in December from a month earlier to the highest level since November 2001, the Bank of Japan said today in Tokyo. The currency gained 29 percent against the euro last year as $1 trillion in losses on mortgage- related securities worldwide prompted Japanese investors to shun higher-yielding overseas assets. Gains in the dollar versus the euro may be limited by speculation U.S. services activity shrank to the lowest level since records began in 1997. The Tempe, Arizona-based Institute for Supply Management’s non-manufacturing index fell to 36.5 in December, according to a Bloomberg News survey of economists. A reading of less than 50 signals contraction. Fed Minutes The data are due at 10 a.m. New York time. Reports due at the same time will show fewer Americans signed contracts to buy existing homes in November and factory orders fell for a fourth month, separate surveys indicate. The Federal Reserve will also today publish minutes from its Dec. 16 policy meeting, at which policy makers cut the target rate for overnight lending between banks to a range of zero to 0.25 percent for the first time. “The markets need to be wary of a possible downside surprise to the ISM services data,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan&cls; currency&cle; trader. “This is likely to weigh on the dollar.” The euro may fall 5.6 percent to 87.50 British pence over the next three months, Standard Chartered Plc forecast, citing technical charts that predict price movements. The euro last traded at 91.29 pence from 92.74 pence. Daily momentum indicators such as the relative strength index and the stochastic oscillator charts are “turning bearish, favoring downside retracement,” Callum Henderson, head of global currency strategy at Standard Chartered in Singapore, wrote in a research note today.

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