By Yasuhiko Seki and Ron Harui Feb. 5 (Bloomberg) -- The euro weakened to an eight-month low against the dollar amid concern widening budget deficits will stifle Europe’s economic recovery. The 16-nation euro headed for a fourth weekly loss versus the dollar and yen after credit risk on European sovereigns surged and before reports forecast to show slowing growth in Germany, the region’s biggest economy. The Swiss franc fell from its highest level in more than a year against the euro, fueling speculation the nation’s central bank sold the currency. “Fiscal concerns will continue to weigh on the euro,” Emmanuel Ng, a currency strategist in Singapore at Oversea- Chinese Banking Corp., said in a Bloomberg Television interview. “Over the last few sessions, that situation has been exacerbated and basically spread across all asset markets.” The euro fell to $1.3710 as of 6:40 a.m. in London from $1.3723 yesterday in New York after dropping to $1.3669, the weakest level since May 20. The franc fell to 1.4725 per euro from 1.4642, after earlier rising to 1.4558, the strongest since Oct. 31, 2008. Japan’s currency declined to 122.88 per euro from 122.20 yesterday, when it jumped 3.4 percent, the sharpest gain since October 2008. The yen fell to 89.62 per dollar from 89.05. Credit-default swaps on the MarkitiTraxx Europe index rose to the highest in nine weeks in London. A swaps index tied to Western European government debt traded at the highest since it was introduced in September. The European Central Bank yesterday left its benchmark rate at a record low of 1 percent and ECB President Jean-Claude Trichet signaled he is in no rush to raise borrowing costs. ‘Derail an Exit’ “A diffusion of sovereign problems in the euro-zone may cloud prospects for the region’s economy and derail an exit from stimulus by the ECB,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow in Tokyo. German industrial production rose 0.6 percent in December after gaining 0.7 percent the previous month, according to a Bloomberg survey before today’s report. The nation’s exports fell 0.7 percent in December from the prior month, according to a separate survey ahead of the data on Feb. 9. The franc reversed earlier gains against the euro on speculation the Swiss National Bank sold the currency to fight against deflation. ‘Sharp Spike’ “A sharp spike in the euro against the Swiss franc around noon seems to suggest that there was an action,” said Tomohiro Nishida, a foreign-currency dealer at Chuo Mitsui Trust & Banking Co., referring to Tokyo time. A call requesting comment from Werner Abegg, a spokesman for the SNB in Zurich, wasn’t immediately returned. Bettina Eberhard, a spokeswoman for the Bank for International Settlements in Basel, Switzerland, declined to comment. SNB President Philipp Hildebrand said in an interview with the Wall Street Journal last month that the central bank will continue to “resolutely prevent” any strong gains by the franc to fight deflation. The dollar rallied from near a seven-week low against the yen before an employment report that economists said will show U.S. companies added the most jobs in two years. Payrolls rose by 15,000 in January, according to a Bloomberg survey before the Labor Department report. U.S. firms cut 22,000 jobs in January, ADP Employer Services said Feb. 3. “The U.S. recovery story has been swamped by other factors, but it nonetheless remains a potent dollar positive,” analysts led by Robert Rennie, Sydney-based head of currency research at Westpac Banking Corp., wrote in a note today. “The Dollar Index rally has further to run.” The Dollar Index gained for a third day, rising 0.3 percent to 80.143. G-7 Meeting The Group of Seven nations may call upon China to allow its currency to appreciate, when finance ministers and central bankers start a two-day meeting today in Canada. China’s policy makers have limited gains in the yuan since July 2008 as the world economy suffered its deepest downturn since World War II, after allowing the currency to rise 21 percent over the previous three years. U.S. Treasury Secretary Timothy F. Geithner said yesterday Chinese officials realize a more flexible exchange rate is in their economy’s best interest, and he indicated such a shift is “likely.” “If G-7 steps up calls on China to revalue the yuan, the Chinese currency will become hostage to some upward pressure, and the yen will face similar pressure as part of Asian currencies,” said Masahiro Ito, senior manager of foreign- exchange sales and marketing at Central Tanshi FX Co., a unit of Japan’s largest money broker. French Finance Minister Christine Lagarde said the G-7 wants to avoid “excessive volatility” in currencies, the Globe and Mail reported, citing an interview. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

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