Euro Near Two-Month Low on ECB Outlook; Yen Weakens on China PMI

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The euro was 0.1 percent from its lowest level in more than two months on concern weakening inflation pressures in the region will prompt the European Central Bank to ease monetary policy.

The yen declined versus all 16 major peers after official Chinese data on Feb. 1 showed manufacturing expanded in line with the median forecast of economists in a Bloomberg News survey, damping demand for the currency as a haven. Australia’s dollar held gains from last week before the nation’s central bank sets interest rates tomorrow.

“I’d recommend selling euro-dollar on a rebound,” said Daisaku Ueno, the Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s biggest financial group by market value. “There’s a good chance of additional monetary easing in the euro region if disinflation persists.”

The euro traded at $1.3485 as of 10:58 a.m. in Tokyo from $1.3486 in New York on Jan. 31, when it touched $1.3479, the weakest since Nov. 22. It rose 0.2 percent to 137.85 yen, following a 1.7 percent drop last week. The U.S. dollar rose 0.2 percent to 102.24 yen.

Euro-area consumer prices climbed an annual 0.7 percent last month after a 0.8 percent advance in December, the European Union’s statistics office said last week. That’s the fourth consecutive reading of less than 1 percent while the ECB aims to keep inflation at just under 2 percent.

ECB Action

Data tomorrow is forecast to show December producer prices in the common-currency region fell 0.8 percent from a year earlier, compared with a November reading of minus 1.2 percent.

ECB President Mario Draghi unexpectedly cut the benchmark rate to a record 0.25 percent in November after inflation slowed. Economists at Commerzbank AG and Barclays Plc changed their interest-rate call last month and now expect the central bank to reduce the benchmark to 0.1 percent and set the deposit rate at minus 0.1 percent, from zero, by March. Policy makers hold their next meeting on Feb. 6.

“The ECB Governing Council under President Draghi’s tutelage has shown a remarkable alacrity for acting sooner rather than later,” London-based Royal Bank of Canada strategists Peter Schaffrik and James Ashley wrote in a client note. “Consequently, there has to be a considerable risk that the rate cut we have in place for March instead comes as soon as this Thursday.”

The euro has dropped 0.3 percent this year, according to Bloomberg Correlation Weighted Indexes that track 10 developed market currencies. The dollar has climbed 1.8 percent while the yen is up 5.3 percent, the biggest gainer in the index.

China PMI

Demand for the yen waned following a report showing China’s Purchasing Managers’ Index was at 50.5 in January. The reading from the National Bureau of Statistics and China Federation of Logistics and Purchasing matched the median estimate of analysts surveyed by Bloomberg News and compared with December’s 51. Numbers above 50 signal expansion.

Australia’s dollar rose 0.3 percent to 89.59 yen and New Zealand’s currency gained 0.5 percent 82.92 yen.

The Aussie also strengthened as swaps trades show more than 90 percent odds the Reserve Bank of Australia will keep rates unchanged at 2.5 percent tomorrow. The central bank has cut the benchmark by 2.25 percentage points starting November 2011 to spur the domestic economy as it adjusts to the end of a record mining boom.

RBA Outlook

“I’m sure as much as one can be that the RBA will not be reducing rates,” said Hans Kunnen, a senior economist at St. George Bank Ltd. in Sydney. “I think the text will confirm the current cycle of easing is over and that could be a positive for the Aussie.”

The yen will decline versus the dollar as the Bank of Japan continues with its expansionary monetary policy contrasting with the U.S. central bank’s dialing back of stimulus, according to Ueno at Mitsubishi UFJ Morgan Stanley.

The Federal Reserve is forecast to end its bond purchase program this year, according to analysts in a Jan. 10 Bloomberg survey. It announced on Jan. 29 that it will trim its monthly bond buying by $10 billion to $65 billion.

The BOJ offered to buy 310 billion yen ($3 billion) of government bonds today.

“The weaker-yen-stronger-dollar trend remains unchanged in the medium to long term,” Ueno said. “The recent global recovery is led by developed nations and isn’t dependent on emerging markets.”

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