The euro declined against the dollar after European Central Bank President Jean-Claude Trichet signaled policy makers aren’t finished cutting interest rates to counter the economic slump. The 16-nation currency also weakened versus the yen as the Frankfurt-based ECB lowered its main refinancing rate today by 50 basis points to 2 percent, bringing the reductions since October to 2.25 percentage points, as the global financial crisis pushed the region’s economy into a recession. The euro briefly reversed declines after Trichet said the bank’s next key “rendezvous” will be in March, indicating policy makers may leave borrowing costs unchanged in February. “Any rebound in the euro is likely to be short-lived,” said Neil Jones, head of hedge fund sales at Mizuho Corporate Bank in London. “The ECB will eventually come round to the market’s way of thinking. They will become more sympathetic with the growth story.” The euro dropped to $1.3101 as of 2:55 p.m. in London, from $1.3191 yesterday. Against the yen, the common currency slid to 116.99, from 117.46. The dollar was at 89.24 yen, from 89.05. The euro fell against the dollar, yen and 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 6.2 percent versus the dollar this month. “We didn’t say that it was now the limit and we wouldn’t move any more,” Trichet said during a press conference in Frankfurt following today’s rate decision. Europe’s inflation rate dropped to the lowest level in more than two years in December, giving the ECB scope to lower rates. The inflation 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. Today’s interest-rate cut was in line with the median forecast of 60 economists surveyed by Bloomberg. The ECB’s next meeting is on Feb. 5. “The ECB is still behind the curve,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. Trichet will “have to go below 1 percent.” Stock Declines The MSCI World Index of shares slid 1.6 percent today, its seventh straight decline. First-time claims for U.S. unemployment benefits rose by 54,000 last week, more than forecast, to 524,000, the Labor Department said today in Washington. A report yesterday showed retail sales fell in December by more than twice the amount economists forecast. 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. Dollar Index “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.” The Dollar Index traded on ICE futures, which tracks the greenback versus six major U.S. trading partners, was little changed at 84.823 today, the strongest level since Dec. 11, as investors shunned higher-yielding assets for the safety of U.S. Treasuries. The index gained 4.3 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.” Bank Losses 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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