The euro declined against the dollar for the first week since November on speculation a weakening economy will prompt the European Central Bank to cut borrowing costs further, reducing the currency’s appeal.
The pound slid to within 2 pence of parity with the euro and touched the lowest level in almost seven years with the dollar on speculation the recession in the U.K. will deepen. The greenback rose to a three-week high against the yen as a rally in stocks and an increase in Treasury yields from record lows encouraged investors to buy dollar-denominated assets.
“The pressure on the ECB to begin to lower rates below the 2 percent level is going to be immense,” said Boris Schlossberg, director of currency research in New York at GFT Forex, an online currency brokerage, in an interview on Bloomberg Radio. “Once that occurs, the pressure on the euro is really going to take shape.”
The euro fell 1.3 percent to $1.3855 yesterday from $1.4028 on Dec. 26, the first weekly decline since Nov. 21. It touched $1.3841 yesterday, the lowest level since Dec. 19, after dropping 4.2 percent last year. The dollar rose 1.6 percent to 92.28 yen from 90.81, following a 19 percent drop in 2008. The euro increased 0.3 percent to 127.81 yen from 127.40, after sliding 22 percent last year.
Mexico’s peso was the biggest loser against the dollar this week, dropping 2.1 percent to 13.7338, as a central bank report showed dollar flows from immigrant workers abroad declined in November.
U.K. Housing
Sterling declined 0.7 percent to $1.4484 against the dollar and was little changed at 95.61 pence per euro after the Bank of England reported yesterday that U.K. mortgage approvals slid in November to the lowest level since at least 1999. The pound fell to $1.4354 on Dec. 31, the lowest level since April 2002, and dropped to 98.03 pence per euro on Dec. 30, the weakest level since the single currency’s 1999 debut.
The Bank of England lowered the benchmark interest rate to 2 percent last month, its fifth rate cut in 2008. The central bank will cut its rate to 1.5 percent when it meets on Jan. 8, according to the median forecast of 50 analysts surveyed by Bloomberg.
The yen dropped 5.4 percent to 9.87 versus the South African rand and 5.1 percent to 65.48 versus the Australian dollar as the increase in stocks boosted speculation that investors will resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.1 percent target lending rate compares with 4.25 percent in Australia and 11.5 percent in South Africa.
Stock Gains
The Standard & Poor’s 500 Index increased 6.8 percent this week after falling 38.5 percent in 2008, the biggest rout since the Great Depression. Ten-year note yields rose 0.27 percentage point to 2.40 percent.
The euro, which became the currency of Slovakia on Jan. 1, also fell against the dollar this week as a report showed yesterday that European manufacturing contracted in December at the fastest pace on record. An index based on a survey of purchasing managers by Markit Economics fell to 33.9 in December, the lowest level since the start of the data in 1998. A reading below 50 indicates a decline.
“It’s confirming everyone’s fear that the European economy continues to contract,” said Jessica Hoversen, a currency and fixed-income analyst at MF Global Ltd. in Chicago, who predicted the euro may fall in the first quarter below $1.30. “The ECB has no choice but to continue to cut rates. That’s negative for the euro.”
The ECB will lower its main refinancing rate from 2.5 percent to 1.5 percent by the second quarter of this year, according to the median forecast in a Bloomberg survey of analysts. The central bank cut the rate by 1.75 percentage points since October, the first reductions since June 2003.
Currency Trends
The moving-average convergence-divergence chart is showing a selling signal for the euro versus the dollar. The MACD index for the pair, or the difference between the 12- and the 26-day moving average, fell below the nine-day moving average yesterday for the first time since November, indicating the European currency’s rally starting last month may be over.
“Momentum funds are buying some dollars,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There are views that the dollar has been oversold.”
Zero interest rates in the U.S. may damp global demand for the greenback, hampering the government’s efforts to finance stimulus packages, some traders said.
The Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time last month and shifted its focus to debt purchases to support the economy. The U.S. budget deficit swelled to $164.4 billion in November, official figures show.
“We will be testing the tops again at $1.43 to $1.45 in near term,” said C.J. Gavsie, managing director for foreign- exchange trading at BMO Capital Markets in Toronto, referring to the euro-dollar exchange rate.