The euro weakened to a 16-month low versus the dollar as investors speculated the European Central Bank won’t announce any new measures at a policy meeting tomorrow to stem the region’s sovereign-debt crisis. The 17-nation currency fell for the first time in three days versus the yen and dollar amid bets France’s top credit rating may be cut, even after French Finance Minister Francois Baroin denied having been notified of such a move by a ratings firm. New Zealand’s dollar extended a gain versus the greenback as the Federal Reserve said U.S. economic expansion improved. “The market will probably be disappointed tomorrow in terms of what the ECB will do with buying bonds or lowering the interest rates, and that may weigh on the euro,� said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York. “You’re getting stark adjustments to expectations for European growth versus U.S. growth.� The euro declined 0.6 percent to $1.2707 at 5 p.m. in New York. It touched $1.2662, the weakest level since Sept. 10, 2010. The 17-nation currency depreciated 0.5 percent to 97.67 yen, approaching an 11-year low of 97.28 yen reached Jan. 9. The dollar was unchanged at 76.85 yen. New Zealand’s currency, nicknamed the kiwi, erased losses and touched a two-month high as American stocks reversed a decline. The Fed said in its Beige Book survey the U.S. economy “expanded at a modest to moderate pace� from late November through year-end while hiring was limited and housing remained stagnant. The Dow Jones Industrial Average was down 0.1 percent after falling 0.5 percent earlier. Kiwi’s Advance The kiwi gained 0.3 percent 79.70 U.S. cents after weakening 0.2 percent earlier. It touched 79.75 cents, the strongest since Nov. 9. Sterling was the worst performer against the dollar among major currencies after data showed the U.K. trade deficit increased more than forecast. British retail-store inflation also slowed to the least in 16 months, fueling bets the Bank of England will need to add stimulus to aid the economy. The pound dropped 1 percent to $1.5329 and fell 0.5 percent to 82.90 pence per euro. The euro weakened earlier after Fitch Ratings said the ECB should boost its bond purchases to avert a collapse of the shared currency. Ratings Reviews Standard & Poor’s put the ratings of 15 euro nations, including AAA rated Germany and France, on review on Dec. 5 for possible downgrades, saying it may cut the French grade by as many as two steps. Moody’s Investors Service said Dec. 12 it will review European Union countries’ ratings after a Dec. 9 summit failed to produce “decisive policy measures� to end the debt crisis. “Rumors of potential French downgrades underscores the problems existing in Europe,� said John McCarthy, managing director of currency trading at ING Groep NV in New York. “The whole tenor of the problem has not changed one iota and in some respect is getting worse because downgrade is a reflection of worsening conditions, not improving. So in the back of one’s mind it gives more credence to a lower euro.� The ECB will keep its key interest rate at 1 percent at a policy meeting tomorrow, according to the median estimate of 53 economists surveyed by Bloomberg News. That would follow quarter-percentage-point cuts at each of the bank’s two meetings since Mario Draghi succeeded Jean-Claude Trichet as president. German Economy The German economy shrank “roughly� 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today. Industrial production in the euro region is forecast to have shrunk for a third month in November, according to a Bloomberg News survey before a report tomorrow. “The European data builds the case that Draghi can be a little more dovish tomorrow,� said Kathy Lien, director of currency research at the online currency trader GFT Forex in New York. “I’m a big proponent of euro weakness, and I think it’s headed below $1.25. I think today’s move only cements the fact there’s a good fundamental reason why the euro is falling.� The euro lost 4.9 percent over the past three months in the worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar gained 3.8 percent and the yen added 2.7 percent. The U.S. currency rose today against most major peers as investors sought the safety of Treasuries, pushing yields on 10- year notes to a one-week low of 1.90 percent. Dollar Index (DXY) The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained as much as 0.7 percent to 81.493, approaching Jan. 9’s 81.503, the highest since September 2010. Brazil’s real fell for the first time in three days versus the dollar after a report showing prices declined unexpectedly in January bolstered bets the central bank will speed the pace of borrowing-cost cuts. Policy makers have lowered the benchmark rate 1.5 percentage points since August to 11 percent to shore up the economy. The real sank as much as 0.7 percent to 1.8120 to the greenback before trading at 1.8025, down 0.2 percent. It reached a one-month high of 1.7949 yesterday. To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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