Euro Trades Near 6-Week Low Against Yen Before ECB Rate Meeting

Jan. 15 (Bloomberg) -- The euro traded near a six-week low against the yen on speculation the European Central Bank will cut interest rates by a least half a percentage point at a policy meeting today.

The yen strengthened versus most higher-yielding currencies yesterday as a slide in U.S. retail sales raised concern the global recession is deepening, boosting the haven appeal of the Japanese currency. The Russian ruble fell to the weakest in six years against the dollar yesterday after the central bank devalued the currency for the third time in four days.

“There’s no doubt that the ECB will cut rates by 50 basis points, with some expecting 75 and even 100 basis points,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. “It’s obvious that the euro zone’s economy is worsening. There’s a downside risk for the euro.”

The euro traded at 117.45 yen as of 8:45 a.m. in Tokyo, after dropping 0.3 percent yesterday, when it touched 116.58, the weakest level since Dec. 5. The euro traded at $1.3194 per U.S. dollar after touching $1.3093, the lowest since Dec. 11. The yen was at 88.99 per dollar, following a 0.4 percent gain yesterday when it reached 88.61, the strongest since Dec. 19.

Europe’s single currency may “test” yesterday’s low of $1.3093 and 116.58 yen today, Muramatsu said.

Russia’s ruble fell to as low as 31.91 per dollar yesterday, the weakest since 2003. The ruble has dropped 26 percent since August. Bank Rossii, which manages the currency against a target euro-dollar basket to protect exporters from currency fluctuations, expanded the trading range yesterday, a bank official said, without providing details.

Real, Rand, Peso

Brazil’s real, South Africa’s rand and Mexico’s peso led a decline in emerging-market currencies yesterday after the Commerce Department reported U.S. retail sales fell 2.7 percent in December, extended the longest string of declines on record. The real dropped 2.3 percent to 2.3705 per dollar, bringing its three-day loss to 5 percent. The peso touched 14.188 per dollar, the weakest level since October, and the rand lost 1.5 percent to 10.18 per dollar.

The Standard and Poor’s 500 Index tumbled 3.4 percent yesterday, while U.S. Treasuries rose.

The Japanese currency gained as much as 2.6 percent versus the real and advanced 2.3 percent against the Mexican peso as investors sold higher-yielding assets and bought back low-cost loans in Japanese currency. Japan’s 0.1 percent benchmark compares with 8.25 percent in Mexico and 13.75 percent in Brazil.

The yen has advanced against all major currencies this year, rising 9 percent versus the New Zealand’s dollar and 7.8 percent against the euro.

‘Best Looking Currency’

“Given the intense risk aversion that’s in the market, the yen is the best looking currency in a contest of ugly currencies across the board,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Over the next six months, as the global economy slows sharply and earnings releases disappoint to the downside that risk aversion will remain elevated and deteriorate further.”

The Dollar Index traded on ICE futures, which tracks the greenback versus six major U.S. trading partners, touched 84.64 yesterday, the strongest since Dec. 11, as investors flocked from higher-yielding assets into U.S. Treasuries for safety.

The index has gained 3.8 percent this year, after losing 6 percent in December, when the Fed lowered its benchmark interest rates to a range between zero and 0.25 percent, a record low.

Deutsche Bank

“The improvement in the tone of risk appetite since earlier this year had a set-back,” said Todd Elmer, a currency strategist at Citigroup Global Markets in New York. “The correlation between risk aversion and a stronger dollar is not over yet. That means continued strength in the dollar versus high-yielding assets.”

The euro began to weaken after Deutsche Bank AG, German’s largest bank, reported a record loss of about 4.8 billion euros ($6.34 billion) in the fourth quarter.

A Credit Suisse Group AG gauge of probability based on overnight index swaps indicated the ECB will lower its 2.5 percent main rate by at least half a percentage point today, with 7 percent odds that the cut will be deeper. The median forecast of economists surveyed by Bloomberg is for a 0.5 percentage-point reduction.

The European currency rose 10 percent versus the dollar in December when ECB President Jean-Claude Trichet said he didn’t want to be “trapped” with borrowing costs too low. The rally reversed this month as speculation mounted that the ECB will be forced to cut interest rates again as economic slowdown deepened. The euro lost 6 percent versus the dollar this month.