Euro Drops for Fifth Day on Bets ECB Will Lower Rates

The euro fell for a fifth day against the dollar as signs of economic weakness in the single-currency bloc fueled speculation the European Central Bank will cut interest rates as soon as at its meeting next week.

The 17-nation currency lost the most in a week since July 2012 after data yesterday showed the region’s inflation unexpectedly slowed and the jobless rate climbed to a record. The dollar gained versus 14 of its 16 major peers as a gauge of U.S. manufacturing rose to a two-year high. South Africa’s rand slid after the nation’s trade deficit grew more than forecast. A gauge of currency volatility increased for a second day.

“A disflationary environment, combined with a strong euro, is a dangerous combination,” Camilla Sutton, Toronto-based head of currency strategy at Bank of Nova Scotia, wrote in a note to clients. The ECB “will turn far more dovish at its Nov. 7 policy announcement.”

The euro sank 0.7 percent to $1.3487 at 5 p.m. in New York, extending this week’s slide to 2.3 percent, the most since the five days ended July 6, 2012. It touched $1.3480, breaching its 50-day moving average of $1.3487. The shared currency declined 0.4 percent to 133.08 yen after sliding to 132.61, the lowest since Oct. 11. The yen lost 0.3 percent to 98.67 per dollar and slid 1.3 percent on the week.

Higher Volatility

A measure of price swings among the currencies of Group of Seven nations rose to a two-week high. JPMorgan Chase & Co.’s G7 Volatility Index reached 8.12 percent, the highest since Oct. 15. It dropped to 7.48 percent Oct. 28, the lowest this year. The 2013 average is 9.37 percent.

The South African rand weakened for a sixth day against the dollar, the longest stretch of losses in five months, after the nation posted a trade deficit of 18.9 billion rand ($1.9 billion) in September. Economists in a Bloomberg survey forecast a gap of 16.4 billion rand.

The currency sank 1.4 percent to 10.1898 per dollar after falling to 10.2174, the weakest since Sept. 6.

Sweden’s krona dropped versus all of its 16 major peers except the rand after a report showed manufacturing expanded less than forecast. Swedbank Markets said its index of factory output fell to 52 in October from 56 the previous month. A Bloomberg News survey predicted a decline to 54.5.

The krona dropped 0.9 percent to 6.5395 per dollar in its fifth straight daily loss. The Swedish currency has depreciated 2.3 percent versus the greenback since Oct. 30, the biggest two-day decline since June. It declined 0.2 percent versus the euro today to 8.8203.

Krone Climbs

Norway’s krone rose to a five-week high versus the euro after an index of manufacturing based on a survey of purchasing managers climbed to 53.6 last month, the highest since May 2012, damping speculation the central bank will cut borrowing costs.

The krone advanced as much as 0.6 percent to 8.0263 per euro, the strongest level since Sept. 24, before trading at 8.0543, up 0.2 percent. The currency depreciated 0.5 percent to 5.9716 per dollar.

“Today’s PMIs do not seriously question the Scandi recovery story,” Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen, wrote in a note to clients. “Overall growth in the manufacturing sector is accelerating, hence reducing the risk of a Norges Bank cut. Euro-krone lower is indeed a natural reaction.”

Fed Stimulus

The dollar extended gains as the Institute for Supply Management’s factory index for October climbed to 56.4, the highest since April 2011, weakening the case for the Federal Reserve to maintain stimulus. Readings above 50 signal growth. A Bloomberg survey forecast 55.

The Fed said Oct. 30 it would keep purchasing $85 billion of bonds per month to put pressure on borrowing costs and spur growth as it awaited more evidence the economy is improving.

The Bloomberg U.S. Dollar Index gained for a sixth day, rising 0.4 percent to 1,015.69. It touched 1,016.58, the highest since Sept. 18.

The euro area’s annual inflation rate declined to 0.7 percent last month, the least since November 2009, from 1.1 percent in September, the European Union’s statistics office said yesterday. Unemployment in the region was at a record 12.2 percent in September, separate data showed.

Bank of America Corp., UBS AG and Royal Bank of Scotland Group Plc forecast the ECB will cut rates on Nov. 7. BNP Paribas SA, Societe Generale SA, JPMorgan Chase & Co. and Scotiabank predict a reduction in December, when the central bank will publish new economic projections. The ECB last lowered its benchmark rate on May 2 to a record 0.5 percent.

‘Fragile’ Recovery

“The European recovery, which we always knew was a bit fragile, just looks that much weaker,” Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview. “As a result of those numbers from yesterday, there are quite a few people formally calling for the ECB to ease policy.”

The euro will test support between $1.3450 and $1.3570, Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in a phone interview, referring to technical levels where there may be buy orders.

The euro has slumped 1 percent this week among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It was the worst performer after Sweden’s krona. The dollar strengthened 1.6 percent, while the yen increased 0.1 percent.

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