By Bo Nielsen and Inyoung Hwang Feb. 4 (Bloomberg) -- The euro weakened to its lowest level since June against the dollar after European Central Bank President Jean-Claude Trichet said the economic outlook is subject to “uncertainty.” The single currency fell against the yen after Trichet said some governments in the region have “sharply rising” deficits and should have a “strong focus” on reforms. The pound fell against the dollar after the Bank of England kept open the option to extend its bond-purchase program. The yen gained against higher-yielding currencies after reports showed Australian retail sales unexpectedly shrank and New Zealand’s jobless rate surged to the highest level since 1999. “If any of the negative events in Europe come through, the impact will be significant,” said Lauren Rosborough, a senior currency analyst at Westpac Banking Corp. in London. “The market is very sensitive to Trichet’s comments.” The euro dropped to $1.3779 at 10:15 a.m. in New York, from $1.3893 yesterday. It traded below $1.38 for the first time since June 16. The euro fell 1.5 percent to 124.55 yen. The Japanese currency strengthened to 90.47 per dollar, from 90.98. The euro has lost 3.5 percent this year against the dollar on concern Greece and other so-called peripheral nations will face increasing difficulty in curbing budget deficits that are in excess of European Union limits. ‘Right Direction’ “We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said at a press conference in Frankfurt after the ECB left its main interest rate at a record low 1 percent. Proposals announced this week on freezing wages and changing the pension system “are steps in the right direction.” Greece’s largest union is set to approve its second strike this month following Prime Minister George Papandreou’s pledge this week to raise taxes and increase the retirement age. Greece, Portugal and Spain have suffered a “permanent” decline in competitiveness since joining the euro, European Monetary Affairs Commissioner Joaquin Almunia said yesterday. “Almunia warned that Greece and Portugal have quite big financing needs,” analysts led by Hans-Guenter Redeker, London- based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note today. “The euro-dollar is on the edge of its next leg down.” Kiwi, Aussie The New Zealand dollar declined against all but one of its 16 most-traded peers tracked by Bloomberg, losing 1.6 percent versus the yen. The Australian dollar dropped versus 11 of 16. Australian retail sales fell 0.7 percent in December from November, the Bureau of Statistics said in Sydney. Economists had forecast a gain. New Zealand’s unemployment rate climbed to 7.3 percent last quarter from 6.5 percent in the previous three months, Statistics New Zealand said. “Emerging uncertainties about the Australian economy hurt sentiment toward higher-yielding currencies,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “Lingering sovereign woes in Europe also helped strengthen risk aversion.” The yen gained versus all of the 16 most-traded currencies as stocks declined, with the MSCI World Index falling 0.7 percent and the Standard & Poor’s 500 Index dropping 1 percent. Japan’s currency tends to strengthen during times of economic and financial turmoil because a trade surplus makes the nation less reliant on foreign capital. The dollar benefits from its role as the world’s reserve currency. ‘Default Fears’ “The yen demand is driven by building sovereign default fears,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “The sharp rise in Portuguese bond yields over the past couple of days shows worrying signs that initial Greek fears are spreading.” The yield on Portuguese 10-year notes jumped 7 basis points to 4.74 percent today. Implied volatility on one-month euro-dollar options rose to 10.6 percent, from 10.4 percent in New York yesterday. Wider fluctuations increase the risk for carry trades, in which money that investors borrow from countries with relatively low interest rates is used to buy higher-yielding assets elsewhere. The pound fell after the Bank of England said it will pause its asset-purchase program, while leaving open the door to buy more as the economy emerges from the recession. Policy makers also kept the key rate at a record low of 0.5 percent. Sterling traded at $1.5782, from $1.5892 yesterday. It dropped as low as $1.5761 earlier, the weakest since Oct. 13. To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net.

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