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Euro, facing grim outlook, piles on losses

NEW YORK: The euro wilted to uncharted lows against the yen and British pound and sagged to a one-month floor against the dollar on Wednesday in an eruption of negative sentiment about Europe's single currency.

Piling on the pain a day before the European Central Bank is expected to announce a decision to keep interest rates on hold, the euro's losses this week mounted to almost 4 percent against the yen, around 2.5 percent against the dollar and 3 percent against sterling.

"The move this week hasn't had much fundamental news behind it but the market is looking for reasons to sell euros," said Jim McCormic, currency strategist at J.P. Morgan.

"Its really just an accumulation of a lot of bad stories. If you look hard enough, you'll find some," he said.

The catalyst for Wednesday's action came overnight, when a spike in Japanese industrial output sent the yen higher on hopes of recovery in the world's second largest economy.

Positive expectations for next week's Bank of Japan quarterly "tankan" survey of business sentiment also fired the yen's engine, as did a rally by Japan's benchmark Nikkie stock index to its highest level since mid-1997.

The yen rocketed to an all-time high against the euro of 100.02 yen in early New York trading. The euro's declines triggered heavy stop-loss selling against the dollar, and the euro tumbled to a one-month low of 94.79 cents Ñ less than one cent above last month's record low of 93.90 cents.

Like the euro, the dollar had also dropped against the yen overnight, falling to a two-week low near 105 yen. But the dollar erased nearly all its losses, closing at 105.89 yen <JPY=> on fears the Bank of Japan may again intervene in the market to curb yen strength.

The Bank of Japan has sold yen at least 16 times since June 1999 to keep a strong currency Ñ which can make Japanese exports more expensive overseas Ñ from thwarting economic recovery.

The euro, however, failed to mount much a comeback. It clawed off its lows but closed 1 percent weaker against the yen at 100.66 yen <EURJPY=> and 0.93 softer against the dollar at 95.14 cents <EUR=>.

"Everything is working against the euro," said John McCarthy, senior vice president at ING Barings Capital Markets, predicting it was likely to retest its all-time lows this week.

He cited a drop-off in the purchase of European equities by US investors and an uptick in direct investment out of Europe into the United States and Japan as some broad factors undermining the euro.

J.P. Morgan's McCormick said a shake-up in the French Finance Ministry and French foot-dragging at a European Union economic summit on liberalising many key sectors were also holding the euro back.

Analysts said the euro was also pressured by expectations that the ECB would keep its refinancing rate unchanged at 3.5 percent on Thursday, doing little to narrow US-European interest rate differentials.

A Reuters poll of 22 economists in Europe and North America showed none expected the ECB to raise rates.

But Tim Fox, Standard Chartered currency strategist, said the euro was nearing levels that would heighten ECB concern about the inflationary impact of a weak currency driving import prices higher.

"I don't think there is going to be a rate hike (Thursday) but you are getting to a phase if you see further weakness there are upside risks to imported inflation becoming more pronounced," Fox said. "I don't think you should be complacent about it."

The euro's weakness was compounded as it staged 1.6 percent to a record low of 59.57 <EURGBP> pence against the British pound. Sterling has found support since Britain's top who central bankers this week ruled out slashing interest rates to tame the pound's strength.ÑReuters