Euro slows down advance

Euro Trades Near Week-Low Against Dollar Before ECB Decision
By Ron Harui and Stanley White

Oct. 4 (Bloomberg) -- The euro traded near the lowest in a week against the dollar on speculation the European Central Bank will hold its target lending rate at 4 percent today, as government officials expressed concern over the currency's gains.

The euro has declined 1.3 percent from an all-time high versus the dollar reached Oct. 1 as traders bet ECB President Jean-Claude Trichet will keep rates unchanged to gauge the impact of a global credit market slump and the appreciation of the 13-nation single currency. Italian Prime Minister Romano Prodi said yesterday he was ``worried'' about the euro's advance.

``We could see the euro come off a little bit further,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The ECB is sure to keep rates on hold, and Trichet is likely to say any future action depends on how financial markets behave. European officials have also launched verbal intervention to stem the euro's gains.''

The euro traded at $1.4094 at 10:10 a.m. in Tokyo compared with $1.4090 yesterday in New York. It was at 164.47 yen from 154.50 yesterday. The European currency may fall to $1.4060 and 163.95 yen today, Soma said.

The U.S. dollar was at 116.74 yen from 116.75 yesterday when it touched 116.78, the highest since Aug. 23. Australia's dollar traded at 103.24 yen from 103.30 yen late in Asia yesterday. New Zealand's dollar was at 88.05 yen from 88.57 yen.

Worried About Euro
The implied yield on December's Euribor futures contract fell 1 basis point to 4.62 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 0.16 percentage point above the ECB's key rate since 1999.

Only one of the 55 economists polled by Bloomberg News forecast the ECB will raise its target lending rate to 4.25 percent at its meeting in Vienna today. The central bank will announce its decision at 1:45 p.m.

French President Nicolas Sarkozy said Sept. 20 that Europe may be less competitive if the ECB doesn't reduce borrowing costs. Prodi told journalists in Rome yesterday that he and German Chancellor Angela Merkel spoke briefly about the euro and expressed their concern.
Policy makers of the ECB, the 27-member European Union and the Group of Seven nations are expected to discuss the euro at meetings in Washington that begin Oct. 19.

``With European officials making preventive comments on the appreciation of the euro, it is becoming hard to buy ahead of the G-7 meeting,'' said Keiichi Iguchi, a dealer in Tokyo at Resona Bank Ltd. It may fall as low as $1.40 today, he said.

The Bank of England, which concludes a two-day policy meeting today, will maintain interest rates at 5.75 percent, according to all but one of 60 economists polled by Bloomberg.

BOJ's Iwata
The yen may weaken on speculation Bank of Japan Deputy Governor Kazumasa Iwata will today reiterate the central bank's policy of gradually raising interest rates.

Iwata was the sole dissenter when the board voted to double the benchmark overnight lending rate to 0.5 percent in February, the central bank's most recent rate increase. He will speak at a financial conference in Shimonoseki, Yamaguchi Prefecture in western Japan at 11:10 a.m. today.

``Iwata, known as the most dovish BOJ member on rate increases, will say Japan's wages and prices are not accelerating and consumption is not getting much stronger,'' said Masafumi Yamamoto, currency economist at Nikko Citigroup Ltd. in Tokyo. ``He won't raise expectations of rate increases this year, weighing on the yen.''

Japan's currency may move between 113 and 118 per dollar this month, Yamamoto said.

Investors see a 3 percent chance of a rate increase at a BOJ meeting on October 10-11, down from 4 percent yesterday, according to Credit Suisse Group calculations using overnight index swap rates.