Euro declines on speculation ECB will lower rates

The euro weakened for the first time in four days against the yen amid speculation the European Central Bank will cut interest rates to a record-low 0.5% at a meeting today.

The 17-nation currency snapped a four-day gain versus the dollar as a euro-area report showed the region’s manufacturing industry contracted at a faster pace last month. The yen strengthened against most of its 16 major counterparts as China’s factory output slowed, spurring demand for the relative safety of Japan’s currency. Sweden’s krona declined as manufacturing in the nation unexpectedly shrank.

“The question is whether they will cut rates or not,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “It certainly seems that the weakness of the euro-region economy is one of the bigger burdens on the euro. If they were to not cut rates, it would be a disappointment for the market and be euro positive.”

The euro declined 0.2% to 128.16 yen at 12:111 p.m. London time after rising 0.5% during the previous three days. The single currency fell 0.1% to $1.3166. The yen was little changed at 97.37 per dollar after appreciating to 97.01 on April 30, the strongest since April 16.

The ECB will cut its main refinancing rate by a quarter percentage point when policy makers meet today, according to the median estimate of 70 economists in a Bloomberg News survey. The decision is due at 1:45 p.m. in Bratislava, where the Governing Council is meeting. Draghi holds a press conference in the Slovakian capital 45 minutes later.

‘One Shot’

“The ECB will cut by at least 25 basis points today and I’m also in the camp that thinks the ECB should cut by 50 basis points,” Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich, said on Bloomberg Television in a interview with Francine Lacqua. “I wouldn’t be surprised if they go all the way down in one shot today.”

A gauge of manufacturing in the euro area declined to 46.7 last month from 46.8 in March, London-based Markit Economics said. The reading has been below 50, which indicates contraction, for 21 consecutive months.

The euro has dropped 1.5% in the past three months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The dollar gained 2.4% and the yen tumbled 2.9%.

The yen strengthened the most against higher-yielding currencies such as the Australian dollar after HSBC Holdings Plc and Markit Economics said their index of Chinese manufacturing fell to 50.4 in April from 51.6 the previous month.

‘Safe Haven’

“The yen still hasn’t completely shaken off its safe-haven mantel,” said Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “During periods of market stress dollar-yen has tended to buck the upward trend that it’s been in.”

Minutes of the Bank of Japan’s April 3-4 meeting released today showed some board members said there existed a “great opportunity” to end deflation. At that gathering, the central bank agreed to double holdings of government bonds and stock funds to reach its target of 2% annual inflation.

Sweden’s krona weakened for the first time in seven days against the dollar after Swedbank AB said its index manufacturing based on a survey of purchasing managers dropped to 49.6 in April from 52.1 the previous month.

The central bank last month pushed back plans to increase its main lending rate, in part as a strengthening krona has reduced inflation. The Riksbank predicts it won’t raise its 1% repo rate until late next year.

The krona fell 0.3% to 6.4862 per dollar and weakened 0.2% to 8.5382 per euro. The currency has strengthened 3.9% against the dollar and euro in the past 12 months, making the nation’s exports less competitive.

Bloomberg News

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