Euro Falls Versus Dollar on Economic Divergence With U.S.

The euro fell for the first time in five days versus the dollar amid bets the region’s economy will trail that of the U.S., spurring the European Central Bank to keep interest rates low as the Federal Reserve slows stimulus.

The shared currency dropped versus most of its 16 major peers while the yen fell against the dollar, adding to its biggest annual decline since 1979. The pound strengthened to a three-week high versus the euro before U.K. data this week analysts said will show house prices climbed and mortgage approvals rose.

“There’s some downside for the euro-dollar from here,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said in a phone interview. “We expect it to head lower, particularly in the second half of the year, as the pace of U.S. asset purchases dwindles to almost zero.”

The euro slipped 0.2 percent to $1.3776 at 2 p.m. New York time, after climbing to a two-year high of $1.3893 on Dec. 27. The common currency fell 0.1 percent to 145 yen. Japan’s currency dropped 0.1 percent to 105.26 per dollar, extending its drop this year to 17.6 percent.

Dollar Measure

The Bloomberg Dollar Spot Index was little changed at 1,020.40. The gauge, which tracks the greenback against 10 major counterparts, has risen 3.5 percent this year, the most since an 8.9 percent advance in 2008.

Latvia will become the 18th member of the euro area tomorrow, even as opponents of the currency switch outnumber proponents two-to-one as public expectations for accelerating inflation mount, opinion polls show.

Among the 31 most-traded currencies tracked by Bloomberg, the Israeli shekel gained the most versus the dollar this year at 7.7 percent. The Argentine peso lost the most at 24.6 percent.

Argentina’s peso and the yen were the worst performers in the fourth quarter, with the Japanese currency declining 6.6 percent. This month, Hungary’s forint gained the most at 2.8 percent, while the Turkish lira leads losers with 6 percent drop.

Rand, Won

The South African rand weakened versus all 16 of its most-traded counterparts today, extending the biggest annual slide since 2008, after a report showed an expansion in the country’s money supply slowed. The currency fell 1.1 percent to 10.53 per dollar.

South Korea’s won rose against all of its major peers as the currency’s one-month forwards touched their highest level since August 2011. It climbed 0.5 percent to 1,049.80 per dollar after touching 1,048.10, the strongest since August 2008.

The Taiwanese dollar pared its first annual decline in five years, gaining 0.5 percent to 29.807 per U.S. dollar. The currency earlier rose 0.7 percent to 29.765, its biggest increase since Oct. 3.

The Fed said Dec. 18 it would start reducing its monthly bond purchases in January to $75 billion from $85 billion amid an improving outlook for the jobs market. Officials also pledged to keep the benchmark interest rate low “well past the time that the unemployment rate declines below 6.5 percent.”

Rate Cut

The ECB last month cut its key interest rate by a quarter point to a record low of 0.25 percent as the Frankfurt-based central bank said the euro area may face a “prolonged period” of low inflation.

The euro area’s recovery almost came to a halt in the third quarter, with growth slowing to 0.1 percent as France’s economy unexpectedly shrank and Italy extended its longest postwar recession.

The yen has fallen 16.7 percent in 2013 against a basket of nine other developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the biggest slide within the gauge, as the Bank of Japan implemented unprecedented stimulus to support Prime Minister Shinzo Abe’s economic strategy.

Abe plans to raise sales tax on April 1, the first increase since 1997. The yen may strengthen as the policy dims the outlook for consumer spending and pushes down shares. Gross domestic product is estimated to shrink 3.9 percent in the April-June period, the biggest contraction since an earthquake and tsunami struck the nation in March 2011.

‘Significant Improvement’

“As we move into the end of 2013, the sharp improvement that we saw in Japanese sentiment, which did lead to significant improvement in the economic outlook, looks to have shown signs of waning,” said Robert Rennie, Sydney-based global head of currency and commodity strategy at Westpac Banking Corp, who sees the yen trading at 95 per dollar by June. “What will be very important is how the Japanese economy responds to the increase in consumption tax.”

The pound has gained versus most of its 16 major counterparts this year amid speculation strength in the housing market will support the U.K.’s economic recovery.

A gauge of home prices jumped 0.7 percent in December, according to a Bloomberg survey before Nationwide Building Society releases the data on Friday. Mortgage approvals climbed to 69,700 in November, the highest since January 2008, a separate survey showed before a Bank of England report due the same day.

“There’s plenty of evidence that the U.K. economy is doing well,” said Peter Rosenstreich, chief currency strategist at Swissquote Bank SA in Geneva. “The pound should be well supported into next year because of speculation that interest rates may have to go up sooner than what’s implied by the Bank of England. The moves today may be exaggerated a bit by thin year-end trading volumes.”

The pound appreciated 0.6 percent to 83.15 pence per euro after advancing to 83.10 pence, the strongest since Dec. 5. Sterling gained 0.4 percent to $1.6568.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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