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Wed, May 28, 2003 - Page 12 News List

Euro drops against dollar on rate-cut speculation

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The euro, which earlier rallied to a record, plunged against the dollar as traders and investors speculated the European Central Bank (ECB) will cut its key interest rate as much as a half percentage point next week.

Europe's common currency dropped to US$1.1838 at 3:11pm in Tokyo, from US$1.1876 late Monday in New York. The euro earlier gained to a record US$1.1911. The euro declined to Japanese Yen 138.50, from Japanese Yen 138.76.

"Speculation the ECB may cut rates next week, expectation of strong US economic data tonight and the fact the euro rose above US$1.19 this morning encouraged traders to sell the euro," said Shuji Takano, senior foreign exchange manager at Aozora Bank Ltd in Tokyo yesterday.

"Traders in the market expect at least a 25-basis-point rate cut, possibly 50 basis points," next week, which may push the euro to US$1.1750 (yesterday), he said.

The euro gained earlier after ECB council member Ernst Welteke signaled on Monday that the currency hasn't risen far enough to jeopardize the region's exports.

Still, the central bank will probably lower interest rates next month from 2.5 percent, cutting the extra yield euro-denominated investments offer over those in dollars, analysts said.

"The euro's being clobbered," said John Noonan, a strategist at Thomson IFR in Sydney. "There was a big seller out of Asia."

The US currency may also be supported by a report due out yesterday that will probably show US consumer confidence rose for a second month, analysts said.

The rate on next month's Euribor interest-rate futures contract has fallen 12 basis points to 2.19 percent in the two weeks through Monday, suggesting that traders have factored in at least a quarter-point rate reduction at the ECB's June 5 meeting.

A basis point is 0.01 percentage point.

Welteke said an exchange rate around US$1.18 per euro is "competitively neutral" for exports.

EU Monetary Affairs Commissioner Pedro Solbes also said the "evolution of the euro will be beneficial for inflation."

Those comments contrast with those of US Secretary of the Treasury John Snow, who suggested earlier this month that US officials are content to see the dollar slide.

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