Euro, Pound Weaken on Speculation European Rates Will Decline

The euro and the pound fell against the dollar on speculation the European and U.K. central banks will lower interest rates to combat a recession and bank losses.

The 16-nation euro also traded near a seven-year low versus the yen before data that may show business sentiment in Germany slumped. Sterling approached a 23-year low versus the U.S. currency after U.K. home prices had the biggest annual decline since at least 2001.

“The European Central Bank will have to cut rates further than the market expects,” said Paul Robinson, a currency strategist in London at Barclays Capital. “Far too much bad news is priced in the pound.”The euro fell to $1.2945 as of 9:47 a.m.

In London from $1.2975 in New York on Jan. 23, when it slid to $1.2765, the lowest level in more than six weeks. The euro was at 115.23 yen from 115.12 yen and 113.75 earlier. The euro touched 112.15 yen on Jan. 21, the weakest since March 2002. The dollar bought 89.07 yen from 88.75 yen.

The pound dropped to $1.3737 from $1.3804. Sterling reached $1.3503 on Jan. 23, the lowest level since September 1985. The U.K. currency declined to 94.19 pence per euro from 94.02. It also fell to 122.18 yen from 122.42 yen after reaching a record low of 118.85 yen on Jan. 23. The pound may rebound to $1.41 and 92 pence versus the euro in a month, Robinson said.

U.K. Rates-U.K. policy member David Blanchflower said interest rates should be at zero to 0.25 percent to aid the economy, the Sunday Times reported yesterday. The central bank will cut its 1.5 percent main rate by a half-percentage point on Feb. 5, a Credit Suisse Group AG index of derivatives showed. The government’s plan for a second bank bailout in three months has stoked concern the financial crisis is deepening.

“Those that agree with Blanchflower should be bearish on the euro-pound, as we are,” Ashley Davies, a currency strategist in Singapore at UBS AG, the second-largest foreign- exchange trader, wrote in a research note today. “We continue to target euro-pound lower from current levels.”