The euro fell to a one-month low versus the dollar and yen as traders raised bets the European Central Bank will lower borrowing costs and Standard & Poor’s said it may cut Spain’s top AAA long-term sovereign rating. The 16-nation currency also weakened as the International Monetary Fund said Europe is “underestimating” the need for fiscal stimulus. The yen advanced to a three-week high versus the greenback and gained against the Australian dollar on bets the global recession will lead investors to sell higher-yielding assets funded by low-cost loans in Japan. “The ECB continues to be behind the curve, weighing on the euro,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets. “The market is building up worries about global growth. The dollar should do well in this environment.” The euro dropped 1 percent to $1.3347 at 10:54 a.m. in New York, from $1.3476 on Jan. 9, and touched $1.3289, the lowest level since Dec. 12. The euro will fall to $1.20 by the end of March, according to RBC. The currency declined 2.2 percent to 119.15 yen from 121.81 and reached 118.82, the lowest since Dec. 12. The yen gained 1.3 percent to 89.24 per dollar from 90.39, touching 89.22, the strongest since Dec. 22. The yen climbed as much as 4.1 percent to 61.05 versus Australia’s dollar, the strongest level since Dec. 25, and 4 percent to 51.88 versus New Zealand’s dollar on speculation investors will unwind carry trades, in which they get funds in a country with low borrowing costs and buy higher-yielding assets elsewhere. Japan’s 0.1 percent benchmark rate compares with 4.25 percent in Australia and 5 percent in New Zealand. Yen Versus Aussie Japan’s currency strengthened last week versus the Aussie and the kiwi for the first time since early December as a global stock rally reversed. The S&P 500 fell 0.9 percent today. Russia’s ruble slid to the weakest level in almost six years against the dollar after the central bank devalued the currency for a second day as declining oil prices threatened to deepen the nation’s economic slowdown. The ruble depreciated as much as 0.8 percent to 31.1385 per dollar, the weakest level since April 2003. The euro slid for a sixth day against the yen as a Credit Suisse Group AG gauge of probability based on an overnight index-swap index indicated the ECB will cut its 2.5 percent main refinancing rate by as much as 0.75 percentage point on Jan. 15. The index fell to -207.7 today from -165.6 on Jan. 5. A reading of minus 100 indicates a 0.25 percentage point cut. The median estimate of 59 economists surveyed by Bloomberg News was for a 0.5 percentage point cut. ‘Behind the Curve’ Governments in Western Europe are “behind the curve” in implementing stimulus packages and are “underestimating the needs,” the IMF Managing Director Dominique Strauss-Kahn said in a Jan. 9 interview. “Shops are still full” in the region, which hasn’t felt the full impact of the slump yet, he said. The yield advantage of two-year German government notes over those of Japan narrowed to 1.13 percentage points, the least in 18 years, reducing demand for euro-denominated assets. “The way to play it in the near term is to short the euro going into the announcement because the likelihood is that the ECB is going to cut,” said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “My preference is short the euro against the yen.” The euro may weaken to $1.30 versus the dollar and 117 yen by the end of the first quarter, according to Calyon. A short position is a bet an asset will decline. The currency will have a “short-lived bounce” should the ECB not cut rates this week as the declining global economy keeps fueling dollar demand, according to Merrill Lynch & Co. ‘Supply of Dollars’ “The supply of dollars into the foreign-exchange market is shrinking fast via a rapid contraction in the U.S. external deficit,” Steven Pearson, a strategist at Merrill Lynch in London, wrote in a research report today. “We expect the challenging economic and financial environment to continue to foster safe-haven demand for the dollar.” The European common currency lost 5.3 percent against the yen, 4.4 percent against the dollar and 6.4 percent against the pound this year as reports showed services and manufacturing shrank December by the most in at least a decade and inflation fell below the ECB’s target of just under 2 percent for the first time since August 2007. Sweden’s krona declined 1.4 percent to 8.0328 per dollar as global stock market losses sapped demand for the less liquid currencies of small economies, while Norway’s krone declined as the price of crude oil, its biggest export, fell below $39 a barrel for the first time in 2009. Current-account surpluses and forecasts by the Organization for Economic Co-operation and Development that Nordic economies will avoid the worst of the global recession made the currencies Goldman Sachs Group Inc.’s top picks for 2009, with potential gains of more than 17 percent.

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