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BLBG: Euro Drops Versus Dollar After Trichet Says Growth Is Weakening
 
By Kim-Mai Cutler



Oct. 2 (Bloomberg) -- The euro fell to a 13-month low against the dollar after European Central Bank President Jean-Claude Trichet said economic activity in the region is ``weakening.''

The European single currency slid for a fourth day as Trichet said recent data suggests there are ``increased downside risks.'' The ECB kept its main rate at 4.25 percent today, a seven-year high. The decision was predicted by all 58 economists surveyed by Bloomberg.

``There are significant issues over the weakness in the eurozone economy that need to be addressed,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp.

The euro declined to $1.3824 at 1:37 p.m. in London, from $1.4009 yesterday in New York. It touched $1.3793, the weakest level since Sept. 11, 2007. The euro also fell to 145.76 yen, from 148.11 yen, reaching 145.56, the lowest level since July 11, 2006. The U.S. currency traded at 105.58 yen from 105.71 yen.

The U.S. currency rose against 15 of its 16 most-actively traded peers as demand for dollar funding increased amid the seizure in the money markets. The dollar also advanced after the Senate approved a $700 billion bank-rescue bill, bolstering expectations the U.S. will act faster than Europe to address the credit squeeze.

Producer Prices

European producer-price growth slowed in August from an 18- year high in the prior month as oil prices slid from a record, easing inflationary pressures , the European Union statistics office in Luxembourg said today.

Producer prices in the 15 euro nations rose 8.5 percent from a year earlier after increasing by 9.2 percent in July, the highest since the data series began in 1990. Oil has fallen by about 33 percent since reaching an all-time high of $147.27 a barrel on July 11.

The ECB kept its key rate unchanged at its meeting on Sept. 4, when Trichet said the region is undergoing an ``episode of weak activity.'' The economy contracted by 0.2 percent in the second quarter, the government said Sept. 3. Its report for the third quarter is due Nov. 14.

Traders have raised bets on a rate cut in coming months. The implied yield on the Euribor futures contract expiring in March was at 4.26 percent today, from 4.77 percent a month ago.

The ECB will lower borrowing costs in December as financial turmoil increases growth risks, JPMorgan Chase & Co. and Goldman Sachs Group Inc. said two days ago, revising their forecasts.

Rate Predictions

JPMorgan's David Mackie, the chief European economist in London, had previously forecast the ECB would start cutting in March and now predicts the benchmark rate will fall to 2.75 percent by the end of 2009, compared with 3.5 percent before. Goldman's Erik Nielsen, the chief European economist in London, who had expected the benchmark to stay at 4.25 percent through the middle of 2009, sees three quarter-point reductions by then.

Dexia SA, the world's biggest lender to local governments, received a 6.4 billion-euro state-backed rescue this week as the credit crisis spread to Europe. Governments in Belgium, the Netherlands and Luxembourg extended a lifeline to Fortis, Belgium's largest financial-services firm, and Hypo Real Estate Holding AG received a loan guarantee from Germany.

The U.S. Senate voted 74-25 in favor of legislation that links the rescue plan for financial companies to an increase in bank-deposit-insurance limits and tax breaks, after the House of Representatives rejected an earlier version of the bill. The House is likely to vote on the latest version tomorrow, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi.

Bailout Proposal

Europe has yet to follow the U.S. with any bailout proposals. France and Germany clashed over whether to create a fund to rescue beleaguered banks. French Finance Minister Christine Lagarde told the German newspaper Handelsblatt a package is needed to help ``smaller'' European states ``threatened with a banking failure.'' German finance ministry spokesman Torsten Albig told reporters in Berlin his government ``doesn't support the plan.''

``Europe hasn't yet taken steps in a unified manner,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank. ``Market consensus is that the U.S. bill will eventually pass in some kind of form. The package is likely to reduce worries over the U.S. and bolster the dollar.''

Foreign banks are paying near the highest premiums in at least a decade to borrow in dollars in the swaps market even after the Federal Reserve increased funds available to other central banks this week to $620 billion.

``The ability to secure funds in the money market hasn't improved in the slightest,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``This should support the dollar as banks that need the currency will simply buy it outright in the foreign-exchange market.''

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

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