Euro Falls on German Services as Krona Hits 12-Year High

The euro weakened after German services contracted last month, adding to speculation the European Central Bank will reduce interest rates tomorrow.

The shared European currency dropped versus 12 of its 16 major counterparts as a report showed euro-area services and manufacturing output shrank for a fifth month in June. Sweden’s krona strengthened to the highest level against the euro since December 2000 after the central bank kept rates unchanged, with some economists predicting a cut. U.S. markets were shut for the Independence Day holiday.

“The euro is weaker after the German services index fell back below the 50 level,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “Momentum in the German economy continues to dissipate and that could have an impact on assumptions for the ECB rate decision tomorrow when markets are already expecting a rate cut.”

The euro fell 0.5 percent to 100.07 yen as of 5 p.m. New York time. The 17-nation currency declined 0.6 percent to $1.2527. The yen dropped 0.1 percent to 79.86 per dollar.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, rose 0.5 percent to 82.195.

The ECB will cut its main refinancing rate by a quarter-percentage point to 0.75 percent tomorrow, according to the median estimate in a survey of 63 economists by Bloomberg News.

German Services

A final reading on a German services index was 49.9 in June, versus an earlier estimate of 50.3, according to London-based Markit Economics. A reading below 50 indicates contraction. Markit’s euro-area composite index of services and manufacturing industries was 46.4 last month.

The euro rose the most this year against the dollar on June 29 after after European leaders at a Brussels summit eased terms on loans to Spanish banks, taking a step toward resolving the region’s debt crisis and boosting demand for the shared currency. The euro has fallen 1 percent since then.

“A lot of fear had come out of the market after the European Union summit, but now the feeling is that the problems aren’t going to go away,” Steve Butler, managing director in Toronto at Bank of Nova Scotia’s Scotia Capital unit, said in a phone interview. “The market is scratching their heads wondering, is there any good news?”

Krona Rises

Sweden’s currency gained for the sixth time in the past seven days versus the euro as the Stockholm-based central bank left the repo rate at 1.5 percent, after cutting it twice since December. The decision was predicted by 15 of the 20 economists surveyed by Bloomberg. The rest forecast a reduction to 1.25 percent.

The krona appreciated 0.9 percent to 8.6578 per euro after strengthening to 8.6490.

Implied volatility of three-month options for Group-of-Seven currencies fell as low as 9.35 percent today, the least since May 4, the JPMorgan G7 Volatility Index showed.

The pound fell against the dollar for a third day after a report showed U.K. services growth slowed more than forecast in June.

The Bank of England will raise its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds tomorrow, according to the median estimate of analysts in a Bloomberg News survey.

‘Losing Momentum’

“Even the service sector is losing momentum and that’s not good for growth,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The Bank of England’s focus is shifting toward supporting growth. They will probably expand their gilt purchase program tomorrow and the pound will continue to weaken.”

Sterling declined 0.6 percent to $1.5589. The pound will depreciate to a two-year low of $1.50 over the next three months, Hardman predicted.

A gauge of services activity based on a survey fell to an eight-month low of 51.3 from 53.3 in May, Markit Economics and the Chartered Institute of Purchasing and Supply said in London today. The median forecast of 25 economists in a Bloomberg News survey was a reading of 52.9. Markit said respondents noted “fragile” demand.

The U.K. currency may find support at its June 1 low of $1.5269, according to data compiled by Bloomberg based on technical indicators.

Support refers to an area where analysts expect buy orders to be clustered. The stronger the support, the more selling is needed to break below it.

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