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Euro May Weaken Versus Aussie on ECB Rate View, Citi Says

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July 2 (Bloomberg) -- The euro may sink further against the Australian dollar on speculation the European Central Bank will cut interest rates while the Reserve Bank of Australia is forecast to keep its rate target unchanged week, according to Citigroup Inc.

Australia’s central bank is projected to hold its so-called cash target at 3.5 percent tomorrow after cutting it in each of the past two months, as the nation’s strongest economic expansion in five years reduces the need to guard against fallout from Europe’s debt crisis. The ECB may lower the benchmark rate by 25 basis points, or 0.25 percentage point, at its meeting July 5 as European leaders consider actions to control the area’s debt crisis and bolster the bloc’s economies.

“What’s important is the language of the RBA statement and the assessment of the economy,” Valentin Marinov, head of European and Group of 10 currency strategy at Citigroup in London, said in a telephone interview. “The growing divergence between the increasingly accommodative ECB and the more data-dependent RBA could lead to further tightening in the rate differential between the euro and Australian dollar. In turn, this could add to the cyclical headwinds for euro-Aussie.”

The euro was down 0.7 percent to 1.2290 per Australian dollar at 11:45 a.m. in New York, the least since March 2.

Central Bank

All 28 economists surveyed by Bloomberg News predicted the RBA will leave borrowing costs unchanged tomorrow. The nation’s central bank has cut rates by 75 basis points in its past two meetings. June’s “finely balanced” rate cut was spurred by concern Europe’s debt crisis will slow global growth, the RBA said in the minutes of the policy meeting.

Interest-rate swaps indicate a 76 percent chance the RBA will keep the overnight cash-rate target at 3.5 percent, the highest among major developed nations. The central bank will drop the policy rate to 3 percent by year-end, the data show.

The euro jumped and stocks rose at the end of last week after European leaders dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s blighted banks.

“The ECB attempts to save the EMU should remain inherently euro-negative, especially against risk-correlated currencies,” Marinov said. “Potential ECB measures on Thursday, like rate cuts, extension of the LTRO loan maturity or even additional unconventional monetary policy easing, could support market risk sentiment while adding to the cyclical winds for the single currency on Thursday.”

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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