Jan. 7 (Bloomberg) -- The euro rose against the dollar and the yen on speculation the European Central Bank will cut interest rates at a slower pace than its major counterparts.

The euro also gained against the British pound and the Swedish krona. Derivatives trading showed the ECB will lower borrowing costs by at least 25 basis points at Jan. 15, leaving its benchmark rate higher than the zero-to-0.25 percent in the U.S. and 2 percent in Britain. The dollar held near its strongest level in three weeks against the euro earlier on speculation U.S. President-elect Barack Obama’s $775 billion package of tax cuts and government spending will help the economy recover from a recession.

“The euro sell-off against the dollar in recent days seems to be running its course,” said David Powell, a currency strategist in London at Bank of American Corp. “The ECB’s less aggressive easing will continue to support the euro in the near term. We expect the central bank to cut by 50 basis points next week. But if you put that in contrast to the Fed, the ECB is much more restrained.”

The euro rose to $1.3624 before trading $1.3600 as of 10:11 a.m. in London. The single currency fell to $1.3313 against the dollar yesterday, the lowest since Dec. 12. It rose to 127.36 yen and traded little changed at 126.66 from 126.75 yesterday. Against the pound, the euro strengthened to 91.62 pence from 90.69 pence.

The greenback appreciated to 59.72 cents per New Zealand dollar from 59.88 yesterday in New York. The South Korean won strengthened to 1,292.70 per dollar from 1,312.70 as overseas investors added to their holdings of the nation’s stocks.

ECB Rates

Powell, who predicts the euro will rise above $1.40 by the end of this quarter, said the Federal Reserve is likely to keep its fed funds rate near zero into early 2010. Economists in a Bloomberg survey forecast the ECB will cut interest rates to 1.50 percent by June, and refrain from reducing borrowing costs beyond that.

The ECB cut interest rates by 1.75 percentage points since early October to 2.5 percent as the region entered a recession. Policy makers will lower the main rate by at least a quarter of a percentage point at the next meeting on Jan. 15, according to a Credit Suisse Group AG gauge of probability, based on overnight index-swap rates.

The euro also rose against the dollar after Fed policy makers said in the minutes of the Dec. 15-16 meeting that they saw “substantial” risks to the slumping economy last month as they cut the benchmark interest rate to a record low and pledged to expand emergency loans if necessary.

Auto Rescue

“What is clear from the rise in the euro-dollar from yesterday’s intraday low of 1.3313 is that market participants remain concerned over the scale of easing being undertaken by the Federal Reserve,” said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mistsubishi Ltd. in London.

Further declines in the dollar many be limited in the near term after the U.S. Treasury pledged as much as $13.4 billion in aid to help GM pay its bills and $6 billion to prop up lender GMAC LLC, which GM relies on for auto loans and dealer support.

GM got the first $4 billion on Dec. 31 from the Troubled Asset Relief Program administered by the Treasury. The company said it’s using that money to pay bills, mostly to its 3,000 suppliers.

Obama, who takes office on Jan. 20, is pushing for tax cuts worth $500 for individuals, according to a House Democratic aide, and his economic stimulus plan includes the largest infrastructure investment since the 1950s.

Slowing Inflation

The euro traded at 90.52 British pence from 90.70. It fell by 5.3 percent in the last two days, the biggest drop since the currency’s debut in 1999, on speculation slowing inflation will give the ECB room to cut interest rates to tackle a recession.

European producer prices fell the most in 27 years in November as oil prices declined. Prices of goods leaving euro- area factories plunged 1.9 percent from the previous month, the sharpest decline since the data were first compiled in 1981, the European Union statistics office in Luxembourg said today. That was almost double the 1 percent drop economists forecast, according to the median of 20 estimates in a Bloomberg survey.

Gains in the dollar may be limited by speculation the U.S. job market has deteriorated further. Companies in the U.S. eliminated 493,000 jobs in December after cutting payrolls by 472,000 the previous month, ADP Employer Services may say today, according to a Bloomberg News survey. The data are due at 8:15 a.m. New York time.

U.S. non-farm payrolls fell 500,000 in December, bringing last year’s decline to 2.4 million, the most since 1945, according to a separate survey before Labor Department figures due Jan. 9. The unemployment rate likely jumped to 7 percent, the highest level since 1993.

The Pound

“We may see the dollar decline on worse-than-expected employment data,” said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world’s largest money manager for institutions. “There’s a risk that people are expecting too much from the U.S. economy.”

The pound briefly fell versus the dollar after Chancellor of the Exchequer Alistair Darling said the outlook for the U.K. economy is difficult, according to an interview with the Financial Times. Sterling was last quoted at $1.4916, little changed from yesterday.

The Bank of England will lower its benchmark rate by half a percentage point to 1.5 percent when it announces a policy decision tomorrow, according to a Bloomberg survey.

“In the current climate, no responsible finance minister could say that’s the job done, far from it,” he said, according to the FT.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.netStanley White in Tokyo at swhite28@bloomberg.net

Last Updated: January 7, 2009 05:12 EST