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Euro Declines as Cooling Inflation Gives ECB Scope for Easing

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Feb. 28 (Bloomberg) -- The euro fell versus the dollar, extending its first monthly drop since July, amid Italian political wrangling about forming a government and as cooling regional inflation opens the door for central bank stimulus.

The 17-nation currency weakened against most of its major peers as European Central Bank President Mario Draghi signaled at an event in Munich late yesterday that the bank has no intention of tightening monetary policy anytime soon. The U.S. economy barely expanded in the fourth quarter, erasing a previously estimated contraction. The rand fell 1.7 percent against the greenback as South Africa posted a record trade gap in January.

“The euro over $1.31 looked like it was skating on thin ice, given the unresolved situation in Italy,” Joe Manimbo, a market analyst at Western Union Business Solutions, said in a telephone interview. “We’re seeing the euro trade on its own fundamentals today, and that leaves the single-currency vulnerable.”

The euro weakened 0.6 percent to $1.3057 at 5:11 p.m. New York time and fell 3.8 percent this month. It was down 0.3 percent to 120.85 yen, a 3 percent drop in February. The dollar rose 0.4 percent to 92.56 yen.

Winners, Losers

Brazil’s real has gained 0.7 percent to the greenback and South Korea’s currency is up 0.5 percent in February, the biggest gainers of the dollar’s 16 most-traded peers, according to data compiled by Bloomberg. The pound lost 4.4 percent, the biggest decline, while Norway’s krone weakened 4.8 percent.

This year, the real has strengthened 3.7 percent as the pound has lost 6.7 percent.

“The pound had enjoyed a haven premium for a long time, despite the disconnect in its underlying fundamentals,” said Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million. “With the relative stabilization of the euro, or at least the belief that sovereign holdings will be made money good by the ECB, you removed the technical bid.”

Britain’s economy shrank in the fourth quarter as exports fell and an uncertain outlook depressed company investment. The subdued outlook prompted Bank of England Governor Mervyn King and two other policy makers to vote for more quantitative easing this month.

Rand Falls

South Africa’s trade shortfall reached 24.5 billion rand ($2.8 billion) last month compared with 2.7 billion rand in December, the Pretoria-based South African Revenue Service said. The median estimate of eight economists in a Bloomberg survey was 9.7 billion rand.

The nation’s currency extended its decline today to 2.4 percent to 9.0246 per dollar.

Italian Finance Undersecretary Gianfranco Polillo said a union of Pier Luigi Bersani’s Democratic Party and the group led by Silvio Berlusconi was “the only possible way.” Berlusconi, who left office in November 2011 with yields approaching euro-era highs, ran on promises to reverse austerity.

Prices Gauge

Euro-zone innflation eased to 2 percent in January from 2.2 percent in December, the European Union’s statistics office said. Seven euro-area economies are expected to shrink this year, with the Netherlands joining Italy, Spain, Portugal, Greece, Cyprus and Slovenia, the Brussels-based European Commission said Feb. 22.

“You have a lot of uncertainty in Europe right now, concerns regarding political gridlock in Italy, and also concerns about growth in the euro zone,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “Those definitely have been limiting any gains in euro, which is contrary to what we saw earlier this year.”

The ECB will probably maintain its benchmark interest rate at 0.75 percent next week, according to a Bloomberg News survey of economists. The central bank will update its December economic forecasts after the euro area’s recession deepened in the fourth quarter. The European Commission sees inflation at 1.8 percent this year and 1.5 percent in 2014.

“Draghi has been sounding a little bit more dovish,” Credit Agricole’s Harajli said. “We continue to look for a rate by 25 basis points later on this year by the ECB. The figures we got overnight argue in favor of our view.”

Budget Update

The Dutch budget deficit will breach the European Union limit again this year and next as the economy shrinks and unemployment increases, according to the government’s planning agency. German unemployment unexpectedly fell in February amid signs that Europe’s biggest economy is returning to growth.

“That doesn’t stop people from sleeping,” Sebastien Galy, a foreign-exchange strategist in New York at Societe Generale SA, said of the Dutch deficit. “It’s a fair statement to say that if countries fairly close to Germany in terms of behavior aren’t following the criteria, that weakens the hands of the most austerity-prone people.”

U.S. gross domestic product grew at a 0.1 percent annual rate, up from a previously estimated 0.1 percent drop, revised figures from the Commerce Department showed.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, rose 0.5 percent to 81.978, touching the highest since Aug. 22.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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