Euro slips over speculation on ECB rates

THE euro weakened against most major counterparts on speculation the European Central Bank (ECB) has finished raising rates as the region’s sovereign-debt crisis curbs economic growth.

The yen rose versus 12 of its 16 major peers as US consumer confidence dropped to the lowest since April 2009 and home prices fell, adding to demand for safer assets.

The euro snapped a two-day gain versus the dollar after ECB president Jean-Claude Trichet said this week that the bank is reviewing its assessment of inflation risks, and data yesterday showed confidence in the region’s economy plunged. The ECB meets next week.

“There’s signs that the ongoing financial-market troubles are starting to have a more noticeable impact not only on confidence but on actual economic activity,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co in New York.

“The challenges for the euro are accumulating, and this is a reason the euro is down today.”

US stocks fell as the Conference Board’s index slumped to 44.5 this month, from a revised 59.2 reading in July, figures from the New York-based private research group showed. It was the biggest point drop since October 2008. Economists in a Bloomberg survey predicted the August gauge would fall to 52. The Standard & Poor’s 500 Index dropped 0.6%.

The S&P/Case-Shiller index of property values in 20 cities fell 4.5% in June from a year earlier, after dropping 4.6% in the 12 months ended in May, the group said. The median forecast in a Bloomberg survey was for a 4.6% drop.

The ECB is scheduled to meet on interest rates on September 8.

“Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September,” Mr Trichet told the European Parliament’s economic panel in Brussels this week. The comment contrasts with his more recent policy statement on August 4, when he said risks to the inflation outlook were “on the upside”.

The ECB has raised its benchmark interest rate twice this year to 1.5% to curb above-target inflation.

A Credit Suisse AG index shows traders are betting the ECB will cut its key rate by 20 basis points, or 0.2 of a percentage point, in the next 12 months. A month ago, they wagered it would raise rates 22 basis points.

“We no longer expect the ECB to hike rates this year,” said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA in London. “That means the euro is likely to receive less interest-rate support than previously anticipated.”

The euro extended losses after the European Commission said an index of executive and consumer sentiment in the single-currency region fell to 98.3 in August from a revised 103 in July. That was the lowest since May 2010 and below the 100.2 reading predicted in a Bloomberg survey.

The eurozone’s economy expanded in the second quarter by 0.2%, the least since 2009. Italian bonds fell for a seventh day, the longest streak of declines since February, as demand weakened at the first auction of 10-year securities since the ECB began buying the nation’s debt. Investors bid for 1.27 times the amount on offer. That compared with a bid-to-cover ratio of 1.38 at the prior auction of comparable debt July 28.

“Not much has changed; it’s still a bearish economic environment,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London. “Traders are still hesitant to move out of ranges.”

Federal Reserve Chairman Ben Bernanke said last week he has scheduled an extra day for the central bank’s next policy meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response.

Fed Bank of Chicago president Charles Evans has called for an easier monetary policy and said he favours setting unemployment and inflation markers that would trigger a pullback from near-zero interest rates.