Oct. 23 (Bloomberg) -- The euro fell to the lowest level since December 2002 against the yen and dropped to the weakest in almost two years versus the dollar on speculation the European Central Bank will cut interest rates.

The 15-nation currency dropped for a seventh day against the greenback, its longest stretch since Sept. 8, after ECB Executive Board member Jose Manuel Gonzalez-Paramo signaled lower borrowing costs. The British pound declined to near a five-year low on speculation U.K. consumer spending shrank and the economy slowed.

``There are concerns over a deepening slowdown in Europe that may lead to further rate reductions,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``The euro may test immediate support at $1.2680.''

The euro fell to 125.01 yen as of 7:05 a.m. in London from 125.60 late yesterday in New York, after dropping to as low as 123.43. The euro weakened to $1.2805 from $1.2855 late yesterday. It reached $1.2728, the lowest since November 2006. The currency may weaken to 120 yen and $1.2680 today, Saito said. The yen gained to 97.63 per dollar from 97.66, after rising above 97 for the first time since March 2008.

Europe's single currency declined as the ECB's Gonzalez- Paramo told the Irish Independent newspaper in an interview today the bank expects ``inflation to come down more quickly than a month ago as a result of slower growth, lower commodity prices.''

``Weakness was entrenched early in the Asian session following dovish comments from ECB Executive Board member Gonazalez-Paramo in the Irish Independent,'' wrote Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney, in a research note today.

ECB Rate Bets

Investors are betting the ECB will lower borrowing costs by another 0.75 percentage point by June after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8, part of coordinated reductions by major central banks.

The implied yield on the three-month Euribor contract expiring in June fell to 3.125 percent today, the lowest level since October 2005, from 3.175 percent yesterday.

Asian currencies slumped on concern global growth will slow. The South Korean won slid 3.3 percent to 1,408.90, the Taiwanese dollar lost 1.1 percent to NT$33.367 and the Malaysian ringgit slipped 0.7 percent to 3.5703.

``Growth concerns are gaining increasing traction and risk aversion remains very much in play,'' said Yen Ping Ho, a currency strategist at JPMorgan Chase & Co. in Singapore. ``Currencies in the Asian region remain under pressure.''

U.K. Economy

Sterling traded at $1.6292 from $1.6267, after touching $1.6139 yesterday, the lowest since September 2003. It dropped as much as 3.4 percent, the biggest decline since September 1992, when investor George Soros drove the currency out of Europe's system of linked exchange rates. The pound was at 78.65 pence per euro.

U.K. retail sales fell 0.7 percent in September, according to a Bloomberg survey of 33 economists. The Office for National Statistics will release the data at 9:30 a.m. in London. Gross domestic product expanded 0.5 percent in the third quarter from a year ago, slowing from 1.5 percent the previous quarter, government data may show tomorrow, a separate survey showed.

``We expect U.K. GDP to contract for three consecutive quarters,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``There could be 1 percentage point of rate cuts into next year. This is a good excuse to sell sterling.''

Prime Minister Gordon Brown joined BOE Governor Mervyn King in predicting yesterday that the U.K. will slip into a recession.

Asian Stocks Tumble

The yen gained as Asian stocks tumbled, prompting investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.

Japan's currency gained 0.8 percent to 65.21 against the Australian dollar and 0.1 percent to 13.5410 versus the Norwegian krone from late in New York yesterday. The Bank of Japan's target lending rate of 0.5 percent compares with 6 percent in Australia and 5.25 percent in Norway.

The MSCI Asia-Pacific Index of regional shares slid 3 percent after the Standard & Poor's 500 Index dropped to the lowest level since April 2003 yesterday.

``The stock rout is likely to push the yen up further against the euro,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The pound also looks vulnerable due to weak economic fundamentals. People are giving up on emerging markets, which is another sign investors don't want to take on risk.''

Chinese Companies

Implied volatility on one-month dollar-yen options rose to 26.42 percent from 23.91 percent yesterday, indicating greater exchange-rate fluctuations that may erode profit on carry trades.

The New Zealand dollar remained lower against its U.S. counterpart today after the Reserve Bank cut the official cash rate by 1 percentage point to 6.50 percent. The kiwi fell 0.2 percent from late yesterday in Asia to 59.47 U.S. cents. The Australian dollar fell 0.3 percent to 66.67 U.S. cents.

China Railway Group Ltd. and China Railway Construction Corp., two of the nation's biggest building companies, reported today a combined 2.26 billion yuan ($331 million) in losses after their holdings of Hong Kong, U.S. and Australian dollars depreciated against the yuan. The yuan, little changed today at 6.8369 per dollar, has gained 6.7 percent this year against the U.S. currency.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: October 23, 2008 02:21 EDT