The euro declined against the dollar after the European Central Bank cut its benchmark rate by 50 basis points to 2 percent, the lowest level in almost six years to counter an economic slump. The 16-nation currency also weakened versus the yen on speculation that policy makers may signal further reductions in a press conference later. The ECB cut its key interest rates by 2.25 percentage points since October as the global financial crisis pushed the region’s economy into a recession for the first time in 10 years. Today’s cut was in line with a forecast by 60 economists in a Bloomberg survey. “Rates will have to come down further because economic data will be disastrous in Europe,” said Ian Stannard, currency strategist in London at BNP Paribas SA. “People are selling the euro because they expect the ECB to signal at the press conference that further easing is possible, albeit at a slower pace. The ECB can’t go on dragging their feet.” The euro traded at $1.3112 as of 12:52 p.m. in London, from $1.3191 yesterday. Against the yen, the common currency weakened to 116.96 yen from 117.46 yen. The euro fell against the dollar and the pound this year on speculation the ECB will be forced to emulate other central banks by lowering borrowing costs. The Federal Reserve and Bank of England cut their benchmark rates by at least 4 percentage points in the past year. Rally Reversed The European currency rose 10 percent versus the dollar in December when Trichet said he didn’t want to be “trapped” with borrowing costs too low. The euro lost 5.7 percent versus the dollar this month. Europe’s inflation rate dropped to the lowest level in more than two years in December, giving the ECB scope to lower interest rates to tackle the deepening recession. The rate in the euro area fell to 1.6 percent from 2.1 percent in November, the European Union statistics office said in Luxembourg today. The rate matched the initial estimate published on Jan. 6. The median forecast of economists surveyed by Bloomberg was for the ECB to cut the main refinancing rate by 50 basis points today. Central bank President Jean-Claude Trichet will hold a press briefing on the decision from 2:30 p.m. in Frankfurt. The MSCI World Index of shares slid 0.7 percent today and U.S. stock futures expiring in March declined 1.1 percent. A U.S. report yesterday showed retail sales fell in December by more than twice the amount economists forecast. Yen Strength The yen advanced against all major currencies this year, rising 10 percent versus the New Zealand’s dollar. Japan’s 0.1 percent benchmark rate compares with 5 percent in New Zealand. The euro may fall to a seven-year low against the yen as the yield spread between two- and 10-year German government bonds widens, suggesting investors raised bets the ECB will be forced to cut borrowing costs, according to Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. Charts showed that over the past year, the euro-yen exchange rate had a correlation of 0.9 with the German yield spread. The yield gap widened to 1.44 percentage points today from 1.19 percentage points at the end of last year as the economic slowdown deepened. “I wouldn’t be surprised to see the euro fall to around 110 yen,” said Sasaki. “A widening yield spread and the interest-rate outlook leave the euro vulnerable to selling.” Dollar Index The Dollar Index traded on ICE futures, which tracks the greenback versus six major U.S. trading partners, was little changed at 84.619 today. It touched 84.639 yesterday, the strongest level since Dec. 11, as investors shunned higher- yielding assets for the safety of U.S. Treasuries. The index gained 4 percent this year, after losing 6 percent in December, when the Fed lowered its target rate for overnight bank loans to a range between zero and 0.25 percent, a record low. “The improvement in the tone of risk appetite since earlier this year had a set-back,” said Todd Elmer, a currency strategist at Citigroup Global Markets in New York. “The correlation between risk aversion and a stronger dollar is not over yet. That means continued strength in the dollar versus high-yielding assets.” The dollar may be supported by speculation widening losses at financial institutions will prompt U.S. investors to favor their own currency as a haven. JPMorgan Chase & Co. said today fourth-quarter profit fell 76 percent. Citigroup Inc. will issue earnings tomorrow and Bank of America Corp. will post results on Jan. 20. The world’s largest banks have posted losses and writedowns of $1 trillion since the start of 2007 on mortgage-related securities, according to data compiled by Bloomberg. “Expectations for fourth-quarter earnings are low and financial institutions will likely report further losses and writedowns,” Brian Kim, a Stamford, Connecticut-based currency strategist at UBS AG, wrote in a research note yesterday. “We expect the dollar to remain supported as capital preservation becomes increasingly important.”

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