Euro Trades Near One-Month Low on ECB Outlook, Spain’s Rating

Jan. 13 (Bloomberg) -- The euro traded near a one-month low versus the dollar as traders raised bets the European Central Bank will reduce interest rates, decreasing the appeal of the region’s assets to overseas investors.

The 16-nation currency was also close to the weakest in a month against the yen after Standard & Poor’s said it may cut Spain’s top AAA long-term sovereign rating. The Australian and New Zealand dollars weakened as commodity prices declined and signs of a worsening global economic slowdown reduced demand for higher-yielding assets.

“There is more than enough room for the euro to fall further,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd. in Tokyo, a unit of Japan’s largest brokerage. “The focus of the currency market is how far rates will fall in Europe, because the ECB is behind the curve compared to other central banks.”

The euro traded at $1.3362 at 8:09 a.m. in Tokyo, unchanged from yesterday in New York, when it touched $1.3289, the lowest level since Dec. 12. The euro was at 119.30 yen from 119.19 yen yesterday, when it reached 118.66, the lowest level since Dec. 12. The dollar was little changed at 89.29 yen. It fell yesterday to 88.88 yen, the weakest level since Dec. 19. The euro may decline to $1.25 by next week, Amikura said.

A Credit Suisse Group AG gauge of probability based on an overnight index-swap index indicated the ECB will cut its 2.5 percent main refinancing rate by as much as 0.75 percentage point this week. The index fell to minus 207.7 from minus 165.6 on Jan. 5. A reading of minus 100 indicates a 0.25 percentage point cut. The median forecast of 59 economists surveyed by Bloomberg News was for a 0.5 percentage point cut.

Fed’s Rate Cut

The Federal Reserve cut its target lending rate in December to a range of zero to 0.25 percent, while the Bank of England lowered its main rate last week by a half-percentage point to 1.5 percent.

“The ECB will push the rates close to where the fed funds rate is,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “In terms of doing everything they can to stimulate the economy and to help restore stability, the ECB has been disappointing. The euro will get hurt.” The euro will decline to $1.2330, the weakest level since April 2006 set in October, according to Upadhyaya.

Europe’s currency lost 5.8 percent against the yen, 4.3 percent against the dollar and 5.8 percent against the pound this year as reports showed services and manufacturing shrank in December by the most in at least a decade and inflation fell below the ECB’s ceiling of 2 percent for the first time since August 2007.

Yield Spread

The yield advantage of two-year German government securities over comparable Japanese debt fell to 1.11 percentage points yesterday, the narrowest in 18 years, reducing demand for euro-denominated assets.

S&P cited “significant challenges” facing the Spanish economy, which has been hit by the combined impact of the global credit crunch and the collapse of a debt-fueled domestic housing boom. The company said it would probably decide on the rating for the nation’s sovereign debt this month.

German Chancellor Angela Merkel’s coalition said yesterday the government will spend an extra 50 billion euros ($66.8 billion) in the next two years to stem the worst recession since World War II in Europe’s largest economy.

The coalition parties agreed on a package of measures including about 36 billion euros in infrastructure investment and lower taxes. These measures are the second German stimulus program in the past two months.

“The latest German stimulus package probably won’t be enough to turn back the tide of euro selling,” said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. “It will take time for these measures to kick in, and other European countries will need to join Germany and announce similar policies. During this time, the ECB is sure to lower rates.”

The euro may fall to $1.30 this week, he said.