The euro declined as European Central Bank President Jean-Claude Trichet said “downside risks” to the euro-area economy have intensified, signaling the ECB may keep interest rates on hold in the coming months. The 17-nation euro extended declines versus the dollar after Trichet said inflation risks are balanced, and no longer to the upside. It dropped earlier as the ECB kept its main interest rate on hold at 1.5 percent, as predicted by all 57 economists in a Bloomberg survey. The dollar strengthened before President Barack Obama unveils proposals to spur job growth and the U.S. economy. The pound rose against most of its peers as the Bank of England resisted calls to increase its asset- purchase program. “The statement has a dovish tone, they’ve revised down their forecasts for growth and inflation by more than the market had expected,” said Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “The market will just start to embrace the idea that the ECB could be cutting rates by the end of the year.” The euro slipped 1 percent to $1.3958 at 1:48 p.m. in London. It reached $1.3972 on Sept. 6, the least since July 13. The euro weakened 0.7 percent to 108.19 yen. The greenback was little changed at 77.28 yen. The pound strengthened 0.1 percent to $1.6008 and 0.9 percent to 87.38 pence per euro. The central bank now forecasts inflation to average between 2.5 percent and 2.7 percent this year and between 1.2 percent and 2.2 percent in 2012, Trichet said. Traders are betting the ECB will cut borrowing costs by 26 basis points over the next 12 months, a Credit Suisse Group AG index based on swaps shows. The Bank of England maintained its quantitative-easing program at 200 billion pounds ($320 billion) today and kept its main interest rate at a record low 0.5 percent. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source