Euro May Fall Before Report to Show Manufacturing Contracts

Feb. 19 (Bloomberg) -- The euro traded near a three-month low against the dollar before reports forecast by economists to show manufacturing and service industries in Europe contracted in February for a ninth month.

The dollar rose above 93 yen for the first time in six weeks yesterday and strengthened to the highest against the euro since November after President Barack Obama pledged $275 billion to stem home foreclosures. The Polish zloty advanced from a near-record low, while the Czech koruna rose 2 percent, after tumbling on Feb. 17 when Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe.

“That the U.S. is doing more in totality than the euro zone will leave the market to presume the U.S. will come out of the slowdown somewhat faster,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International, in an interview on Bloomberg Television. “The banking relations to eastern European economies, and potentially the dragging effect on the banking sector in the euro zone, are all weighing on the euro.”

The euro traded at $1.2543 per euro at 7:16 a.m. in Tokyo, after falling 0.4 percent yesterday when it touched $1.2513, the lowest level since Nov. 21. The dollar was 93.78 yen, after rising 1.5 percent yesterday. It reached 93.96 yesterday, the highest level since Jan. 7. The yen was at 117.65 per euro, following a 1.1 percent drop yesterday.

PMI Data

Europe’s manufacturing and services industries probably shrank in February, according to economists surveyed by Bloomberg News. A gauge of services activity, based on survey of purchasing managers by Markit Economics, was probably at 42.5, compared with 42.2 in January. A reading below 50 indicates contraction. The manufacturing index likely rose to 35 from 34.4.

A “breach” of the so-called support level of $1.2549 per euro would suggest the euro will drop to the $1.2388 level reached on Nov. 13, and possibly to $1.2329, the lowest since April 2006, Tom Fitzpatrick and Shyam Devani, technical analysts at Citigroup Inc. who use charts to predict currency moves, said in a research note to clients yesterday.

Obama’s plan will create a new program to help as many as 5 million homeowners refinance conforming loans owned or guaranteed by Fannie Mae and Freddie Mac, according to information released by the White House. The Treasury Department will buy up to $200 billion of preferred stock in each of the housing companies, twice as much as previously pledged, the announcement said yesterday.

Housing Plan

The plan will entice Japanese investors to buy more securities issued by Fannie and Freddie, known as agency debts, pushing the dollar higher versus the yen, according to Stephen Gallo, head of market analysis at Schneider Foreign Exchange.

“The speculation now is with the U.S. taking more agency debt, Japanese investors will plow into U.S. assets,” said Gallo, who is based in London. “We are pretty close to the top of the yen.”

Japan’s currency declined 2.8 percent to 10.72 versus the Swedish krona yesterday.

Poland’s zloty gained 2.4 percent to 4.7731 per euro yesterday, after tumbling 5.5 percent in the previous two days. Poland sold some European Union grants on the market through the country’s state-owned Bank Gospodarstwa Krajowego to help the zloty, the Finance Ministry said in an e-mailed statement yesterday.

The Czech koruna advanced 2.5 percent to 28.84 per euro after central bank Vice Governor Miroslav Singer signaled policy makers may raise interest rates to arrest the currency’s decline. The currency touched 29.68 on Feb. 17, the weakest since October 2005 as the Moody’s report fueled concern financial turmoil in eastern Europe will deepen.

Hungarian Forint

The Hungarian forint rose 2 percent to 303.22 per euro.

“It’s just a little pull-back from yesterday’s aggressive price actions, where risk appetite fell apart,” said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. “We are in a consolidation in a way. The broad picture hasn’t changed, which is toward negative European currencies.”

The ICE’s Dollar Index, which tracks the greenback versus the euro, yen, pound, Canadian dollar, krona and Swiss franc, reached 88.254 yesterday, the highest level since Nov. 21 when it touched 88.463, the highest level since April 2006. The index gained 8 percent this year.

‘Getting Punished’

Federal Reserve policy makers lowered their projections for economic growth this year, with most seeing a contraction of 0.5 percent to 1.3 percent, according to minutes of the Federal Open Market Committee meeting Jan. 27-28 released yesterday. The economy contracted last quarter at a 3.8 percent annual pace, the most since 1982. The Fed also introduced a long-term U.S. inflation estimate, with most officials aiming to anchor public expectations at a 2 percent rate.

The yen weakened 0.7 percent against the dollar on Feb. 17 even after the Standard & Poor’s 500 Index lost 4.6 percent, on speculation the deterioration of Japanese economy may erode the currency’s status a safe haven. The government said on Feb. 15 that Japan’s economy shrank at an annual rate of 12.7 percent last quarter, the fastest rate since the 1974 oil shock.

“The yen is getting punished,” said Michael Malpede, chief market analyst in Chicago at Easy-forex.com, an online trading firm. “The economic data is Japan is much more disappointing than expected.”