Euro May Extend Drop on Eastern Europe’s Slump, Economic View

Feb. 5 (Bloomberg) -- The euro may extend its decline against the yen and dollar on speculation the slump in Eastern Europe will cause the regional economic slowdown to deepen.

The currency traded near an eight-week low versus the dollar on bets the European Central Bank will make further cuts in borrowing costs later this year. The ECB is forecast by economists to hold the target lending rate at 2 percent today. Kazakhstan devalued the tenge by 18 percent yesterday, and Russia’s ruble approached an 11-year low versus the dollar after Fitch cut the nation’s debt rating.

“Eastern Europe is going to be ugly,” said Adnan Akant, head of foreign exchange in New York at Fischer Francis Trees & Watts, which oversees $29 billion in assets. “I would say sell the euro versus the yen. That trade has more room to go.”

The euro traded at 114.79 yen at 7:24 a.m. in Tokyo, after falling 1.5 percent yesterday. The dollar was little changed at 89.29 yen. The euro was at $1.2857 after declining 1.5 percent yesterday and touching $1.2706 on Feb. 2, the lowest level since Dec. 5.

The 16-nation currency also fell against the dollar yesterday as the European Union’s statistics office in Luxembourg said retail sales fell 1.6 percent in December from a year earlier. The median forecast of 13 economists surveyed by Bloomberg News was for a decrease of 1.4 percent.

“In the euro zone, we still have this drip-feed of bad economic news,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets. “That’s weighing on the euro and keeping risk sentiment on the back burner.”

ECB’s Target Rate

The ECB will hold its main refinancing rate steady at a policy meeting today, according to the median forecast of 53 economists surveyed by Bloomberg. ECB President Jean-Claude Trichet reiterated last week that the next “important” meeting for policy makers will be in March.

The Bank of England will reduce its benchmark interest rate today by a half-percentage point to 1 percent, according to a separate Bloomberg survey of economists.

The dollar erased earlier losses against the yen yesterday after a report showed U.S. service industries contracted in January at a slower pace than economists forecast.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 42.9 from 40.1 in December. Readings below 50 signal contraction. The median forecast of 65 economists surveyed by Bloomberg News was for a decrease to 39.

Kazakh Devaluation

Kazakhstan followed Russia, Ukraine and Belarus in devaluing its currency, abandoning intervention to preserve reserves as local banks and companies struggled to refinance debt. Kazakhstan’s tenge weakened yesterday to 149.65 per dollar from 123.48 after the central bank said in a statement that the currency will trade at about 150.

“The Kazakhstan devaluation is a background factor that has been and continues to weigh on the euro, but we wouldn’t expect that to last forever,” said Ron Leven, executive vice president and a senior currency strategist at Morgan Stanley in New York. “The euro’s going to generally stay pretty range- bound, probably $1.28 to $1.30.”

The ruble slid as much as 1.1 percent to 36.3515 per dollar yesterday, near the weakest since the currency was redenominated in 1998, after Fitch cut Russia’s debt rating for the first time in more than a decade. Fitch reduced the rating to BBB, the second-lowest investment grade.

Poland’s zloty slumped as much as 1.4 percent to 4.6995 per euro yesterday, the weakest level since June 2004, on concern the economic slowdown is worsening and speculation the central bank won’t step into the market to support the currency. Economy Minister Waldemar Pawlak told public radio yesterday that trying to halt the zloty’s slide would be a mistake.

Norway’s krone gained to 8.8811 per euro after Norges Bank lowered the nation’s target lending rate by a half-percentage point to 2.5 percent yesterday. Governor Svein Gjedrem said in a statement that borrowing costs have been cut “considerably.”