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The Euro weakens as the ECB is ready to cut to persuade people to spend more

Tue, Jan 13 2009, 10:31 GMT
by Benny Menashe

Finotec Group Inc.

The euro weakened for a third day versus the dollar, reaching a one-month low, as traders added to bets the European Central Bank will reduce interest rates, decreasing the appeal of the region’s assets. German Chancellor Angela Merkel’s coalition said yesterday it will spend 50 billion euros ($66.6 billion) to support Europe’s largest economy. “There is more than enough room for the euro to fall further,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., 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 with other central banks.” The ECB in the past six months has cut interest rates only half as much as the Federal Reserve. A Credit Suisse Group AG gauge of probability based on overnight index swaps indicated the ECB will lower its 2.5 percent main refinancing rate by as much as 0.75 percentage point this week. The EUR/USD is currently trading at $1.3260 as of 8:30am, GMT.

Sterling slipped against the dollar and the euro on Monday as escalating worries that the global economy will be mired in recession this year raised risk aversion, putting the UK currency under selling pressure. Data last week showing a drastic loss in U.S. jobs in December reminded investors of the economic difficulties to be faced in 2009, evaporating risk demand and prompting traders to book profits after the pound's rally last week. Underlining weakness in the UK, the National Institute of Economic and Social Research estimated at the weekend that UK economic output fell 1.5 percent in October-December, its fastest contraction since 1980. The GBP/USD is currently trading at $1.4665 as of 8:55am, GMT.

Interest rates near zero percent in Japan and the U.S. will encourage investors to borrow in those nations and seek higher returns in Europe and Australia. The yen will weaken to 100 per dollar this year from 89.28 in recent trading, according to the median estimate of analysts surveyed by Bloomberg News. It will fall to 124 per euro from 118.94, a separate poll showed. “Countries with high yields such as Australia and New Zealand may be attractive” to Japanese investors, said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. The company is part of Daiwa Securities Group Inc., Japan’s second-largest brokerage after Nomura Holdings Inc. The USD/JPY is currently trading at 89.70 as of 9:15am, GMT.

Today's Economic Events

Published on  Tue, Jan 13 2009, 10:39 GMT