June 13 (Bloomberg) -- The euro fell to a nine-month low against the dollar after European Central Bank Chief Economist Otmar Issing spurred speculation the bank may reduce interest rates for the first time since 2003.

``In the past, financial markets almost always anticipated ECB policy decisions correctly,'' he told Germany's Der Spiegel magazine when asked whether investors' expectations of a rate cut in coming months are justified. The three-month Euribor interest- rate futures contract for September approached a record low.

The euro is down 11 percent against the dollar this year as the region's economic expansion falters and the ECB keeps its benchmark rate at a six-decade low of 2 percent. Issing, who votes on rates at the central bank, also said slowing growth is easing concerns about inflation.

Against the dollar, the euro dropped to $1.2046 at 7:24 a.m. in New York, from $1.2120 late on June 10, according to electronic currency-dealing system EBS. The dollar strengthened to 109.13 yen from 108.67.

Issing ``is preparing investors for a rate cut and the market is responding to that by selling euros and buying dollars,'' said Neil Jones, a director of foreign-exchange sales at BNP Paribas SA in London. Jones said the euro may weaken to $1.1750 in the next few weeks.

ECB spokesman Nils Buenemann in Frankfurt confirmed the remarks in today's edition of Der Spiegel. He said an advance report of the interview released on June 11 was incomplete.

Pressure on ECB

The yield on the September Euribor interest-rate futures has tumbled 44 basis points from a high of 2.50 percent on Jan. 4 and was at 2.06 percent today. The contract settles to the three- month euro area inter-bank rate offered rate, which has averaged 15 basis points more than the ECB's key rate since 1999.

``The pressure is on the ECB to cut rates, in contrast to the Fed's policy of measured rate tightening,'' said Sue Trinh, a currency strategist in Wellington at Bank of New Zealand Ltd. ``The downside is clearly a risk for the euro.''

The spread between 10-year U.S. Treasury notes and similar- maturity German bonds widened to 92.1 basis points today from 90.8 basis points on June 10. A basis point is 0.01 percentage point. A week ago the difference was 73 basis points.

``Rate differentials have reached critical levels,'' said Umberto Alvisi, a currency strategist in London at Credit Suisse First Boston. ``This is clearly supportive of the dollar. We expect this dollar strength to continue.''

Yen Weakens

Japan's currency weakened to an eight-month low against the dollar. The yen's drop accelerated after it fell to 109, where automatic orders to sell it were placed, said Geoff Kendrick, a currency strategist at Westpac Banking Corp. in London.

Traders typically place pre-set orders to buy or sell a currency to limit losses in the event bets go the wrong way.

``There is still momentum in the dollar and people are going after this trend,'' said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London.

Earlier today, a Japanese government report showed the nation's economy grew at an annual 4.9 percent pace in the first quarter, down from an initial estimate of 5.3 percent.

In contrast to the ECB, the Federal Reserve has increased its target rate for overnight loans between banks eight times since June last year to 3 percent. The Bank of Japan has held borrowing costs near zero for four years.

``I expect we will continue to move the federal funds rate toward neutrality at a measured pace,'' Fed Bank of Philadelphia President Anthony Santomero said in a speech on June 11 to the Pennsylvania Association of Community Bankers and the American Association of Bank Directors in Washington.

Bloomberg Survey

Currency traders, investors and strategists are more bearish on the euro than they've been in more than two years, according to a Bloomberg News survey. Eighty percent of the 44 participants polled on June 10 said to sell the euro against the dollar, up from 47 percent a week earlier.

``Issing is one of the more hawkish ECB council members,'' said Derek Halpenny, a currency strategist in London at the Bank of Tokyo- Mitsubishi Ltd. ``It was quite a subtle comment, but it was effective. In that sense it is certainly helping support interest-rate differentials, which is part of reason euro-dollar is down here.''

Declines in the euro may be limited as a technical indicator suggests its slide is excessive. The euro's 14-day relative strength index against the dollar fell to 24.74 today. A level above 70 or below 30 in the index, a gauge of momentum in a given period, may signal a change in direction.

``The euro may rebound as it's dropped so fast,'' said Takashi Toyahara, a currency trader in Tokyo at Nomura Securities Co. ``The RSI indicates there will be some correction. I don't see much downside risk for the euro from here for today.'' The euro may rise to $1.2180 today, he said.

To contact the reporters on this story: Steve Rothwell at srothwell@bloomberg.net John Brinsley in Tokyo at jbrinsley@bloomberg.net.

Last Updated: June 13, 2005 07:27 EDT