Tokyo: The euro fell against the dollar and the yen on Tuesday, hitting one-month lows as expectations mounted that the European Central Bank (ECB) will cut interest rates this week.
The euro extended losses, also dragged down by a potential downgrade of Spain’s top “AAA” rating by Standard and Poor’s that heightened worries about the euro zone’s economic outlook.
The euro’s fall against the dollar was also partly due to the greenback’s gains against the New Zealand dollar, after Standard and Poor’s warned that New Zealand’s foreign currency debt rating could be downgraded, traders said.
The New Zealand dollar fell to a one-month lows below $0.5600 against the dollar and the kiwi also hit its lowest in a month against the yen.
“Concerns about the sustainability of the economic impact from stimulus plans and the growing fiscal burden worldwide are surfacing after hopes about government spending dominated the market last week,” said Masaki Fukui, a senior market economist at Mizuho Corporate Bank.
The euro dropped 0.7% from late Monday New York trade to $1.3261, after hitting a one-month low of $1.3240 on trading platform EBS.
Against the yen, the euro was down 0.6% at 118.50yen, after falling as low as 118.30yen on EBS, also a month low.
Money market futures on Monday showed investors see a 75 basis point cut, and some were bracing for a full percentage point move.
“Since the euro has been sold recently, investors may cover their short positions if the ECB slashes rates as expected, but the short-covering will not last long,” said Saburo Matsumoto, senior manager at Sumitomo Trust & Banking.
He said chances of an ECB rate cut were high but if the central bank left rates steady the euro would be weighed down, as the market would question the bank’s flexbility in taking measures to counter the recession.
The dollar edged up 0.2% against the yen to 89.30yen but stayed near a three-week low of 88.89yen hit the previous day, not far off December’s 13-1/2-year trough just above 87yen.
Traders said falling global stock markets revived investor risk aversion and prompted investors to move away from higher-yielding currencies like the Australian and New Zealand dollars to the perceived low risk of the yen.
Tokyo shares fell 4.8%, with Sony Corp tumbling on a report of an operating loss and after concerns about massive credit losses at Citigroup knocked US shares down the previous day.
Germany’s ruling coalition reached agreement on Monday on a new economic stimulus package worth 50 billion euros ($67 billion), but the plans have also sparked budget concerns.
“A falling US stock market is a worry for the dollar, but in the near term the market is likely to focus on the deteriorating economic outlook in the euro zone,” the trader said.
As in the case of Ireland and Greece last Friday, S&P said Spain faces a painful rebalancing of its economy and a marked deterioration of its public finances.
The New Zealand dollar tumbled to one-month lows against the dollar and the yen as S&P said the country’s revised outlook reflected growing external imbalances in the economy and the need for a fiscal plan to counter the growing current account deficit.
The kiwi fell 2.3% to $0.5610 after touching $0.5592, the lowest since mid-December, and slid to a one-month low of 49.97yen.