By Keith Jenkins and Yasuhiko Seki March 23 (Bloomberg) -- The euro fell toward a three-week low against the dollar amid speculation European Union leaders will fail to agree on an aid package for Greece at a summit this week, stoking demand for the U.S. currency as a refuge. The euro weakened versus 12 of 16 major counterparts after European Central Bank President Jean-Claude Trichet spoke out against offering the low-interest loans for which the Greek government has pressed. The Swiss franc was near a record high against the euro even after central bank President Philipp Hildebrand said policy makers are ready to act “decisively” to counter any “excessive” gains by the currency. The pound slid after U.K. inflation slowed last month by more than forecast. “The dollar is stronger as concern grows over the euro,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “The battle lines within the EU are becoming increasingly, startlingly drawn. It doesn’t paint a great picture” for the chances of a loan agreement, he said. The euro depreciated to $1.3519 per euro as of 6:13 a.m. in New York, from $1.3558 yesterday, when it dropped to $1.3464, the lowest level since March 2. The euro was at 122.22 yen, from 122.21 yen. The dollar rose to 90.42 yen, from 90.14 yen. Trichet’s demand for stringent terms and German Chancellor Angela Merkel’s push for sanctions against nations that breach deficit limits heightened chances that Greece will leave a March 25-26 summit empty-handed. Prime Minister George Papandreou said he’ll turn to the International Monetary Fund for aid if needed. Trichet, Merkel “There shouldn’t be any subsidy element, no concessionary element” in a potential loan to Greece, Trichet told lawmakers in Brussels yesterday. Merkel said in Berlin that there’s no need for EU leaders to make any “concrete decisions” on Greek aid this week. Luxembourg’s Jean-Claude Juncker, who heads the group of euro-region finance ministers, said the EU won’t “abandon” Greece. “Political wrangling over Greece among EU members may continue to weigh on the euro,” said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., which advises on foreign currency, overseas investments and hedge funds. “This will throw cold water on riskier assets.” The Bank of Greece said in its 2009-2010 monetary policy report yesterday that the Greek economy may shrink 2 percent this year, more than twice the government’s latest forecast, as austerity measures to curb Europe’s biggest budget deficit take hold. The nation’s budget deficit for 2009 may be 12.9 percent, more than four times the EU’s 3 percent limit, it said. BlueGold Sees $1.20 Banks will face “serious challenges” as the economic slump deepens and will need to diversify their sources of funding as the ECB withdraws some emergency financing, the Athens-based Bank of Greece said. The euro may fall toward $1.20 for the first time since March 2006, according to BlueGold Capital Management LLP, as the Greek crisis forges a split in monetary policy between the ECB and the Federal Reserve. “This policy divergence is one of the central pillars of my view going forward,” said Stephen Jen, managing director of hedge-fund manager BlueGold in London and a former chief currency strategist at Morgan Stanley. “It is one more reason for investors to be cautious about the euro.” The franc climbed to a record against the euro yesterday even after the Swiss National Bank said it will “act decisively” to prevent an “excessive” appreciation of the currency if needed, comments that were repeated by Hildebrand in St. Gallen, Switzerland, today. ‘Deflation Threats’ “For Switzerland, we can’t fully rule out deflation threats in the case of renewed external shocks,” said Hildebrand, who took over as head of the SNB in January. “An excessive appreciation of the franc against the euro would for example be such a shock. That’s why we’ll decisively counter any excessive” gains in the franc, he said. UBS AG, the world’s second-biggest currency trader, lowered its forecast for the euro against the Swiss franc yesterday, forecasting that the common European currency will buy 1.42 francs in one month and 1.40 francs in three months. “The justification for large-scale interventions is fading fast with deflation disappearing and economic indicators strong,” analysts including Mansoor Mohi-uddin in Singapore, wrote in a report. The franc was at 1.4334 per euro, from 1.4346 yesterday, when it appreciated to a record 1.4309. Pound Weakens The pound slid as a report from the Office for National Statistics showed U.K. consumer prices increased 3 percent from a year earlier, after rising 3.5 percent in January. The median forecast of 28 economists surveyed by Bloomberg was 3.1 percent. Sterling declined 0.6 percent to $1.5014, and weakened 0.3 percent to 90.02 pence per euro. Australia’s dollar slipped 0.3 percent to 91.54 U.S. cents. It may fall further to a two-week low after retreating from so- called resistance at 92.52 cents, according to Pak Lai Ng, a currency strategist at Forecast Pte in Singapore. The currency’s failure last week to advance beyond that resistance level, which is on a downtrend line connecting the highs reached in November, January and March, suggests it may decline toward major support between 90.66 and 90.93 cents, he said. The currency’s daily momentum indicators such as the 14- day relative strength index, a chart used to predict changes in price direction, also are “topping out,” he said. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net;

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