Sunday, April 19, 2009

Euro Drops to One-Month Low on Concern ECB Discord Will Worsen

The euro weakened to a one-month low against the dollar on concern policy disagreements within the European Central Bank will undermine efforts to help the region’s economy recover.

The yen strengthened versus all of the 16 most-active currencies on speculation the discord among ECB officials will deepen the global slump, spurring investors to reduce holdings of higher-yielding assets. The Dollar Index approached the highest level in three weeks on prospects a U.S. report today will show a gauge of the economy’s direction over the next three to six months improved.

“Investors fear that European policy makers aren’t doing enough to safeguard the economy,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Any sign that the euro zone economy is deteriorating will likely add to the downward pressure on the euro.”

The euro dropped to $1.2980 as of 10:53 a.m. in Tokyo from $1.3044 in New York on April 17. It earlier declined to $1.2967, the lowest level since March 17. Europe’s currency fell to 128.29 yen from 129.33 yen, after touching 128.17, the weakest since March 30.

The yen rose to 98.84 per dollar from 99.16 last week. It advanced to 55.96 versus the New Zealand dollar from 56.32, and climbed to 70.77 versus the Australian currency from 71.64.

The euro has declined against 13 of the 16 most-active currencies this month on signs the recession in the 16-nation region is worsening. Factory output in the euro area slid 18.4 percent in February from a year earlier, the biggest drop since the data series began in 1986, the European Union’s statistics office said April 16.

ECB Debate

ECB council member Axel Weber said last week the bank shouldn’t cut rates below 1 percent, putting him at odds with policy makers who say borrowing costs can fall below that threshold. Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have indicated they may support cutting the target rate below 1 percent and buying debt to pump money into the economy, a policy known as quantitative easing.

“There are cleavages on the unwieldy decision-making ECB governing council,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. “The market sees the apparent disunity as a reason to sell the euro.”

The ECB will lower its benchmark rate by a quarter- percentage point on May 7, according to a Bloomberg News survey of economists.

Yen Gains

The yen rose against higher-yielding currencies as concern the global recession will worsen helped push Asian stocks lower.

“Worries that Europe’s response to its recession is lagging behind other countries is causing risk aversion,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The yen is being bought and may strengthen” to 128.27 per euro and 98.80 against the dollar today, he said.

Japan’s Nikkei 225 Stock Average fell 1 percent and the MSCI Asia-Pacific Index of regional shares slipped 0.8 percent.

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 index fell 0.2 percent in March, after dropping 0.4 percent in February, according to a Bloomberg survey of economists.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, rose to 86.226 from 85.981.