The euro snapped two days of gains against the dollar as forecasts for a deepening slump in the region added to the case for policy makers to cut interest rates and adopt unconventional measures to fight the recession. The euro also fell against the British pound after the European Commission said yesterday the 16-nation economy will shrink 4 percent this year, more than twice the contraction projected in January. The dollar rose versus 10 of its 16 most- actively traded peers after the Wall Street Journal said 10 U.S. lenders will be told to raise more capital, spurring demand for the relative safety of the currency. “The euro’s poor performance reflects uncertainty over the outcome of the European Central Bank’s policy meeting this week,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “Policy makers are likely to cut the interest rate by 25 basis points, but some investors are concerned that they may be more aggressive, that they may opt for quantitative easing rather than just tweaking liquidity measures.” The euro declined to $1.3378 as of 10:45 a.m. in London, from $1.3406 in New York yesterday. It earlier reached $1.3438, the highest level since April 6. Europe’s currency was little changed against the yen at 132.57. The dollar traded at 99.10 yen, from 98.80 yen. Australian Rates Australia’s dollar traded near a six-month high after the Reserve Bank of Australia left interest rates unchanged and said the full effect of its reductions in borrowing costs has yet to be seen. The RBA left the overnight cash rate target at 3 percent in Sydney today after cutting it by a quarter of a percentage point last month. Eighteen of 19 economists surveyed by Bloomberg forecast today’s decision. Governor Glenn Stevens said last month he is confident that stimulus measures, a strong banking system and a pickup in China’s economy will drive a rebound. The median forecast in a Bloomberg survey of 53 economists is for ECB policy makers to lower the benchmark rate on May 7 by a quarter-percentage point to an all-time low of 1 percent. The euro region’s economy will shrink 0.1 percent next year, the commission, the EU’s executive arm in Brussels, said yesterday. “The ECB needs a package with a ‘shock and awe’ effect,” UBS AG analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist, wrote in a research note yesterday. “A token or tame step, which some still expect, would add very little value to policy. We continue to see the euro-dollar at $1.30 in one month.” Bank Capital The dollar was supported after the Journal reported, citing several unidentified people, that the 10 U.S. banks which need to raise more capital may include Wells Fargo & Co., Bank of America Corp. and Citigroup Inc. Wells Fargo would need to increase its capital by $37.4 billion to achieve a 6 percent ratio of Tier 1 capital to total assets, should almost 10 percent of the loans become uncollectible as projected by the bank, analytics firm SNL Financial LLC said in a report completed May 1. SNL said it based its analysis on the adverse economic scenario outlined by regulators and its own stress test. “The WSJ article that banks need more capital is paring risk appetite,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There’s dollar buying.” The Federal Reserve plans to release results of the stress tests on May 7. The Dollar Index, used by the ICE to track the greenback versus the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, was at 83.917, from 83.970 yesterday. Investors ‘Cheered’ “Investors are being cheered by an improving global outlook,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “This backdrop is likely to lead to reduced demand for the dollar and the yen as ‘safe- haven’ currencies.” Australia’s dollar traded at 74.13 U.S. cents, from 74 cents, and bought 73.43 yen, from 73.10 yen. The volume of currency trading will probably be less than normal because of Japan’s “Golden Week” holidays that started yesterday and will end tomorrow, Hampton said. The MSCI World Index erased its 2009 drop yesterday, rising 2.8 percent. The index added 0.6 percent today. U.S. pending home resales beat estimates and China’s manufacturing expanded for the first time in nine months, boosting confidence the worst of the global recession may be over. Manufacturing reports “from China to Europe, eastern Europe and Russia all show a positive turnaround,” BNP Paribas SA analysts led by Hans-Guenter Redeker, London-based global head of currency strategy, wrote in a research note yesterday. “With risk appetite increasing, traditional funding currencies have come under pressure.” The pound climbed to its highest level against the dollar in almost four months as reports showed the decline in the nation’s commercial property and construction markets is easing. The British currency rose to $1.5080, from $1.5018, and traded at $1.5111, the strongest since Jan. 12.

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