London, March 20 (Bloomberg) -- The euro rose to a three-dayhigh against the dollar before an expected interest-rate cut by theFederal Reserve that may leave benchmark borrowing costs in theU.S. and euro zone at the same level. The U.S. central bank's decision is due at 7:15 p.m. London time. Amajority of the 25 investment firms that trade government securitiesdirectly with the Fed expect its policy makers to lower the overnightbank lending rate to 5 percent from 5.50 percent. Ten of the firmsforesee a cut to 4.75 percent, the same level as the European CentralBank's benchmark rate. ``The Fed will probably cut by 50 basis points,'' although a 75 basis-point reduction is also likely, said Valerie Plagnol, chief strategist forCIC Capital Markets in Paris. ``The dollar will be on the weaker side inboth situations. Converging interest rates would call for a lower dollar,''she said. The single currency climbed to 90.54 U.S. cents, from 89.92 lateyesterday, before trading at 90.38. It has fallen 4.1 percent against thedollar this year, and traded in recent days below 90 cents for the firsttime since mid-December. The euro rose to 111.16 yen, from 110.13yesterday. Converging interest rates may benefit the euro by increasing therelative attractiveness of single currency deposits, although someanalysts said U.S. rate cuts will bolster the dollar on optimism that theFed is taking measures to stimulate growth. The rate differential between the U.S. and euro-zone economies hasnarrowed by 200 basis points since June. Many analysts areforecasting further Fed and ECB cuts of 25 to 50 basis points beforethe end of the second quarter.
More Cuts
Fed Chairman Alan ``Greenspan doesn't move in more than 50 basis-point chunks,'' said Stuart Green, an economist at Credit Lyonnais. Hesees a 50 basis-point cut today, followed by as many as two morecuts of 25 basis points bringing the benchmark interest rate down to4.5 percent. ``On the one hand this could make it less attractive to hold dollarassets,'' although a rate cut would ``be positive for U.S. consumerconfidence and it shows the U.S. has a more flexible central bank,''said Michael Rottmann, a currency analyst at HypoVereinsbank inMunich. ``Everything depends on the Fed today. We expect a 75basis-point cut.'' French industrial production figures today reinforced ``the scenario thatthe ECB is ignoring the downside risks to the economy'' by not cuttinginterest rates, Rottmann said. The euro's recent declines have beendriven by the ECB's decision to leave rates on hold amid signs ofenduring inflation. He sees a 25 basis- point ECB cut next month.
Weak French Report
French industrial output dropped 0.3 percent, following a revised 0.2percent gain in December, national statistics office Insee said.Analysts had expected a rise of 0.1 percent in the month. ``U.S. data releases are the ones that matter'' in terms of impactingcurrency markets, Rottmann said. Some investors are expecting the euro to gain this year as U.S.reports show further signs of economic weakness, while euro zonegrowth remains steady. ``There's no reason why the euro shouldn't move back above 90''cents, said Tim O'Dell, who helps oversee about $25 billion at InvestecAsset Management. ``There's a better outlook in Europe than in theU.S.''
Yen Falls
The yen slipped towards yesterday's 22-month low against the dollaras investors bet the Bank of Japan's move to drive interest rates closeto zero won't do much to spur economic growth. The Bank of Japan yesterday said it will add money to the economy,pushing its target for overnight bank lending to zero percent to reviveeconomic growth. Last month, the bank cut benchmark borrowingcosts by 10 basis points, to 0.15 percent. Japan's currency traded at 122.90 per dollar, from 112.47 yesterday,when it weakened to its lowest level since May 1999. Seven out of 12 analysts and traders surveyed by Bloomberg Newstoday said they expect the yen to close its trading below 124 perdollar at the end of this week. ``If you print a large amount of money, other things being equal, thecurrency goes down,'' said O'Dell at Investec. ``The yen trading at 120to 125 (per dollar) is a welcome windfall'' for the economy, he said.