By Bo Nielsen
April 20 (Bloomberg) -- The euro dropped to less than $1.30 for the first time in a month and fell versus the yen on concern disagreement is deepening among European Central Bank policy makers on the measures needed to combat the recession.
The euro also declined against the yen and Swiss franc after the Financial Times Deutschland cited ECB Executive Board member Lorenzo Bini Smaghi as saying the bank’s benchmark 1.25 percent interest rate is “very close” to its floor. Two central bank council members said last week they may support a rate less than 1 percent. The yen rose against all of the 16 most-traded currencies monitored by Bloomberg as European stocks and U.S. index futures dropped.
“It’s inevitable, you’re going to get disagreement on the ECB’s council,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “Currency politics will be a key issue this week.”
The euro dropped to $1.2956 as of 7:21 a.m. in New York, from $1.3044 last week. It earlier declined to $1.2947, the lowest level since March 17. Europe’s currency fell to 127.86 yen, from 129.33 yen, the weakest since March 30.
The yen strengthened as stocks declined on concern the global recession hasn’t eased, stoking demand for the currency as a refuge. The Japanese currency advanced to 98.67 per dollar, from 99.16. It appreciated to 55.28 per New Zealand dollar, from 56.32, and to 69.54 per Australian dollar, from 71.64.
Europe’s Dow Jones Stoxx 600 Index slipped 1.8 percent, the most since March 30, and futures on the Standard & Poor’s 500 Index fell 1.2 percent.
Worsening Economy
The euro dropped to a three-week low versus the yen on signs the recession in the 16-nation region is deepening. The recession in Germany, Europe’s largest economy, worsened in the first quarter, the country’s central bank said.
“The recessive underlying trend in the German economy deepened after real gross domestic product fell by 2.1 percent” in the three months to December, the Frankfurt-based Bundesbank said in its monthly bulletin today.
Asked if he favors cutting the benchmark rate to 1 percent and leaving it there, Bini Smaghi said “it would be more credible to act that way,” according to the Financial Times Deutschland. Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus indicated they may support cutting the target rate to less than 1 percent and buying debt to pump money into the economy. The ECB’s next meeting is May 7.
‘Impairing Demand’
“The uncertainty over the ECB Council meeting is impairing speculative demand for the euro augmented by limited evidence of any improvement in economic conditions in the euro zone,” Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note today.
ECB President Jean-Claude Trichet said in Tokyo on April 18 he wouldn’t exclude another “very measured” rate cut, though a zero interest-rate policy wouldn’t be appropriate for the bank.
The dollar rose amid optimism increased sales on the U.S. corporate-bond market signal a thaw in the global credit freeze. Investment-grade companies sold $16.8 billion in bonds last week, 78 percent more than $9.4 billion the week before, according to Bloomberg calculations.
The dollar started strengthening against the euro three weeks ago “exactly at the time when corporate bonds played catch up with the better equity market outlook,” BNP Paribas SA analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy, wrote in a note today. The U.S. currency may appreciate to $1.2880 per euro in the “near term,” Redeker wrote.
Dollar Index Gains
The Dollar Index climbed for a fifth day, its longest run of gains since January, before the Conference Board releases its index of leading U.S. economic indicators today. The gauge fell 0.2 percent in March, after dropping 0.4 percent in February, according to a Bloomberg survey of economists.
President Barack Obama said yesterday he will demand “accountability” from any U.S. banks that require additional taxpayer money following “stress tests” being conducted by regulators. The tests are being used to determine whether the companies have enough capital to cover losses over the next two years should the recession worsen.
“The policies being taken by the Obama administration are fast and comprehensive and there are signs the recession there is waning,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This is positive for the dollar.”
Currency Swings
The Swedish krona fell for a fourth day versus the euro, dropping 0.7 percent to 11.1033. The Riksbank may cut the benchmark repo rate to a record low 0.5 percent tomorrow, according to 10 of 17 economists in a Bloomberg survey. Six forecast a cut to 0.25 percent and one to 0.1 percent from the current 1 percent.
The bank will give its decision tomorrow at 9:30 a.m. in Stockholm and will for the first time reveal how board members voted two weeks before the minutes are released.
Gains in the yen may be tempered after the JPMorgan Chase & Co. benchmark index of investor expectations for currency swings dropped to a six-month low of 14.4 percent on April 17.
Lower currency volatility indicates smaller exchange-rate fluctuations that can erode profit on so-called carry trades. This strategy involves borrowing funds in countries with lower interest costs, such as Japan, and investing them in nations with higher rates, allowing investors to pocket the difference.
“Big currency moves are behind us,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension-fund manager, with about $99 billion in assets. “The volatility spike has to unwind itself over time. Selling volatility has been the winning trade so far this year and will continue to work well.”
The benchmark interest rate is 0.1 percent in Japan and as low as zero in the U.S., compared with 3 percent in Australia and in New Zealand.
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: April 20, 2009 07:33 EDT
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