Dollar May Gain Versus Euro Before ECB Might Signal Slow Growth

By Ye Xie and Alex Lange


Feb. 7 (Bloomberg) -- The dollar may advance against the euro on speculation the European Central Bank will signal the economy is slowing during its policy meeting.

The U.S. currency yesterday touched the strongest since Jan. 23 versus the euro on speculation the ECB's reluctance to lower interest rates may hamper economic growth. The dollar also rose to a two-week high against the pound amid forecasts the U.K. central bank will cut its interest rate today.

``I've been worried about the euro,'' said Michael Metcalfe, London-based head of macro strategy at State Street Global Markets, a unit of the world's largest money manager for institutions. ``We'll get that shift of stance from the ECB. If the ECB remains hawkish for too long, that will jeopardize the growth expectations for next year. I think you've seen the peak of the euro-dollar.''

The dollar traded at $1.4632 per euro at 7 a.m. in Tokyo, after rising 0.1 percent yesterday when it touched a two-week high of $1.4591. The U.S. currency bought 106.49 yen, after falling 0.3 percent. The euro purchased 155.80 yen, after declining 0.4 percent.

The pound yesterday weakened to as low as $1.9554. The Bank of England will lower its benchmark interest rate a quarter- percentage point today to 5.25 percent, according to 59 of 61 economists in a Bloomberg News survey.

While all 56 economists surveyed by Bloomberg forecast the ECB will keep its benchmark rate at 4 percent today, traders have started to price in the chance of a reduction in the second quarter.

Interest-Rate Futures

Interest-rate futures show the implied rate on the June Euribor contract was 3.93 percent yesterday, down from 4.03 percent on Jan. 30. The rate averaged 18 basis points more than the ECB's benchmark from 1999 until August, when the collapse of the U.S. subprime-mortgage market sparked a squeeze on credit.

``Speculation is that the ECB will adopt a less hawkish stance,'' said Robert Lynch, currency strategist at HSBC Bank USA NA in New York. ``It's going to be problematic for the euro.''

The yen yesterday rose to the strongest level in two weeks against the euro after U.S. stocks fell for a third straight day, deterring investors from holding higher-yielding assets funded by low-cost loans in Japan.

Implied volatility on one-month euro-yen options rose to as high as 14.7 percent yesterday, from 13.65 percent on Feb. 5, the highest intraday level since Feb. 1. Wider currency fluctuations may discourage carry trades.

Carry Trades

In carry trades, investors buy higher-yielding assets with money borrowed in countries that have lower interest rates. The risk is currency swings will erase profits. Japan's 0.5 percent benchmark is the lowest among developed nations.

``The growth outlook remains pretty gloomy'' for the global economy, said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``There's good potential for market volatility to continue. There's still room for the yen to gain further.''

Billionaire Warren Buffett, chairman of Berkshire Hathaway Inc., yesterday said the dollar's value is likely to decline in the next five to 10 years if policies don't change.

Funds are available and can be borrowed ``fairly cheap,'' Buffett said during an appearance in Toronto. ``Force feeding a couple billion to the rest of the world is inconsistent with a stable dollar.''