Euro Trades Near 3-Week Low; EU Inflation May Allow Rate Cuts

Jan. 6 (Bloomberg) -- The euro traded near a three-week low against the dollar before a European Union report forecast to show inflation slowed in December, giving the European Central Bank more room to lower interest rates.

The greenback also advanced against the Australian and the New Zealand dollars and the Swiss franc on speculation U.S. President-elect Barack Obama’s stimulus package may total as much as $1.3 trillion. The pound fell against the dollar and the euro on bets the Bank of England will lower borrowing costs this week.

“The market is leaning toward euro selling,” said Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking Co. in Tokyo. “There are growing signs the ECB will cut rates. Speculation Obama’s stimulus package will be large enough to help the U.S. economy is also supportive for the dollar.”

The euro traded at $1.3629 at 8:37 a.m. in Tokyo from $1.3635 late yesterday in New York, when it touched $1.3547, the lowest level since Dec. 15. The dollar was at 93.26 yen from 93.44 yen. It rose yesterday to 93.60 yen, the highest level since Dec. 8. The euro fell to 127.11 yen from 127.31 yen. The pound fell to $1.4679 from $1.47.

The euro may decline to $1.3550 today, Iizuka said.

The dollar rose to 1.1097 Swiss francs from 1.1089 francs. Against the Australian dollar, the U.S. currency appreciated to 71.57 cents from 71.73 cents late yesterday in New York. It also advanced to 58.94 cents per New Zealand dollar from 59.06.

ECB Policy

Inflation in the euro area probably slowed to 1.8 percent last month, according to the median forecast of 28 economists surveyed by Bloomberg News. The report from the European Union’s statistics office in Luxembourg is due today. The rate fell to 2.1 percent in November from 3.2 percent the prior month, the biggest reduction since at least 1991.

“Poor economic fundamentals in euroland warrant further rate cuts from the ECB,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The interest-rate differential is moving in favor of the dollar again.” The euro may fall to $1.30 in three months, said Upadhyaya.

The ECB cut interest rates by 1.75 percentage points since early October to 2.5 percent as the euro-zone entered a recession. The ECB’s next policy decision is due on Jan. 15.

Obama’s Stimulus

Obama “has indicated that there’s at least 20 economists that he’s talked with, and all but one of those believe it should be from $800 billion to $1.2 trillion or $1.3 trillion,” Senate Majority Leader Harry Reid said after meeting with the president- elect on Capitol Hill. Obama will take office on Jan. 20.

“I am very bullish on the dollar throughout 2009,” said Matt Esteve, foreign-exchange trader at currency-trading firm Tempus Consulting Inc. in Washington, in an interview on Bloomberg Television. “I think it’s because the U.S. economy is best set for recovery in 2009.”

The dollar will advance to $1.10 per euro and 110 yen by year-end, according to Esteve.