The euro fell for a second day against the dollar as traders increased bets that the European Central Bank will cut interest rates to the lowest since 2005 at its Jan. 15 meeting. The currency also dropped to a one-month low versus the yen as Bank of America and Deutsche Bank AG forecast the 16-nation region’s economy will contract 2.5 percent this year. The yield advantage of two-year German government bonds over those of Japan narrowed to the least in 18 years, according to data compiled by Bloomberg. “A large portion of the euro’s demise has been predicated on the view that the ECB is falling behind the curve,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. “The market has priced in a 50 basis-point rate cut from the ECB.” The euro dropped to $1.3400 as of 12:15 p.m. in Singapore from $1.3476 late in New York on Jan. 9. The currency also declined to 120.67 yen from 121.81 yen. It touched 120.42 yen, the weakest since Dec. 12. Against the British pound, the euro traded at 88.80 pence from 88.78 pence. The yen rose to 90.05 per dollar from 90.39. The yen also climbed to 62.48 against Australia’s dollar from 63.59 and strengthened to 52.81 versus New Zealand’s dollar from 53.49 as investors trimmed holdings of higher-yielding assets funded in Japan. The euro may fall to $1.3385 and the dollar may drop to 89.10 yen this week, Trinh forecast. Trading in the foreign- exchange markets may be more subdued than usual because of Japan’s public holiday today, she said. ‘Soft’ Data Thirteen of the 16 most-active currencies strengthened against the euro today as traders bet the ECB will cut its 2.5 percent benchmark interest rate by as much as 0.75 percentage point at a meeting this week. The implied yield on the Eonia forward contract fell to 1.748 percent on Jan. 9 from 1.813 percent on Jan. 8. Eonia is the euro overnight index average. The difference in yield between Japanese and German two- year notes narrowed to 1.13 percentage points today from 1.21 percentage points on Jan. 8, the least since 1990. “The recent run of soft euro-zone data has heightened expectations that the ECB will cut,” Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a research note today. “Concern about the euro-zone outlook will likely keep the euro-dollar defensive early this week.” Accelerating job cuts and declining investment may shrink the European economy by 2.5 percent in 2009, according to Bank of America and Deutsche Bank AG. That’s five times the rate of contraction the ECB staff projected last month. Nordic Currencies The ECB cut its main refinancing rate by 1.75 percentage points to 2.50 percent in the fourth quarter, while the Federal Reserve reduced its benchmark rate by 2 percentage points to as low as zero in the same period. The world’s biggest foreign-exchange traders are snapping up Sweden’s krona and Norway’s krone. 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. Deutsche Bank, the biggest trader in the $3.2 trillion-a- day market, said last week the krona and krone are “well placed” for a rebound. “It’s pretty clear the Scandinavian currencies weakened excessively last year,” said Thomas Stolper, a foreign-exchange analyst at Goldman Sachs in London. “These economies should hold up better than euroland and with improvements in market conditions some of this misalignment will be reversed.” Sweden’s krona declined to 7.9602 per dollar from 7.9232 on Jan. 9, while Norway’s krone fell to 7.0158 from 6.9908. Stocks Fall Japan’s currency gained for a fourth day against the Australian and New Zealand dollars before a U.S. government report this week that may show retail sales contracted for a fifth month in December, adding to signs a recession in the world’s largest economy is deepening. Sales at U.S. retailers declined 1.2 percent last month, capping the longest stretch of declines since records began in 1992, according to the median estimate of economists surveyed by Bloomberg News. The Commerce Department will release the report on Jan. 14. Asian stocks fell, following losses in Europe and the U.S. on Jan. 9. The MSCI Asia-Pacific Index of regional shares excluding Japan dropped 2.6 percent. “We expect the Australian dollar to head lower against the dollar and the yen in line with weaker equity markets,” analysts led by David Woo, London-based global head of foreign- exchange strategy at Barclays Capital, wrote in a research note today. ‘Setting up Expectations’ In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits. Benchmark interest rates are 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S. Any losses in the dollar may be limited as U.S. President- elect Barack Obama is making “significant” changes to his economic stimulus program after members of his own party called elements of the plan inadequate, according to lawmakers. “He’s clearly setting up expectations for quite a significant response,” said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We may see the dollar recover further ground over the course of this week.” The dollar may rise to $1.3300 per euro this week, Morriss said. Obama’s plan for a two-year stimulus program of about $775 billion ran into turbulence in Congress last week when lawmakers criticized elements including a job-creation tax incentive and the share dedicated to tax cuts. Some said Obama’s plan wouldn’t do enough to reduce the nation’s dependence on foreign oil while others called for more infrastructure spending.

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