By Hideyuki Sano
TOKYO, Nov 5 - The euro hit one-week lows against the dollar and the yen on Monday on withering hopes of a euro-zone rate cut and a report suggesting European governments could be masking the true extent of their budget deficits.
In late afternoon, the euro dropped to 88.65 cents, its lowest level since last Monday, from 90.23/27 cents in late New York on Friday.
The single currency dipped to around 109.20 yen, down from an early Tokyo high of 109.70 and 109.82 in late New York on Friday.
Bundesbank President Ernst Welteke said on Saturday that interest rates in Germany were at historic lows -- his second indication in as many days that the European Cental Bank might not cut interest rates this week.
"We must avoid long-term inflationary expectations building up because of liquidity supply possibly becoming too great through further rate cuts," he said.
Welteke's comments came amid increasing pressure for rate reductions to give a boost to sagging euro-zone growth. International Monetary Fund Managing Director Horst Koehler said on Saturday he was convinced the ECB had scope to act.
The market will be watching closely for any clues from ECB President Wim Duisenberg at a meeting of euro zone finance ministers later on Monday. WINDOW DRESSING EURO-ZONE DEFICIT?
Sentiment on the euro was also hurt by a report that euro-zone governments could be using swaps to make budget deficits seem lower than they really are, misleading taxpayers and circumventing EU regulations.
Professor Gustavo Piga of Italy's University of Macerata said he believed at least one euro-zone government had already used swaps to mask the true extent of its deficit, but he did not name the country.
"If the report proves true, it could put upward pressure on euro-zone long-term yields that have managed to flatten recently," Nomura Securities economist Shuichi Obata said.
Under current EU rules, governments do not have to disclose the use of swaps as private banks do.
Piga said they can therefore issue bonds in low interest rate currencies such as the yen without declaring the cost of swapping the proceeds back to their domestic currencies. As they only have to declare the original coupon rate as debt, their borrowing appears lower than it really is.
In mid-October, ECB executive board member Domingo Solans said the difficult global economic and political situation was no reason to deviate from the EU's stability pact for enforcing budget discipline. DLR/YEN FIRMER
The dollar was firmer in Tokyo as a staggering fall in U.S. non-farm payrolls fanned expectations of another U.S. interest rate cut on Tuesday.
The greenback was at 121.83/89 yen compared with 121.64/72 yen in late New York on Friday.
U.S. non-farm payrolls plummeted by 41,5000 jobs in October, the most in two decades as the full impact of the September 11 attacks ripped through the economy.
This sent the unemployment rate shooting up half a percentage point to 5.4 percent in October from 4.9 percent in September.
But the figures raised speculation for another Federal Reserve rate cut -- the 10th this year.
Many market players are now expecting a rate reduction of a half point. In a poll on Friday, 15 of 24 primary dealers of U.S. government securities surveyed also predicted that the Fed will cut rates by 50 basis point on Tuesday.
That would bring the Fed funds rate, which influences borrowing costs across the economy, to 2.0 percent, its lowest level in four decades.
But dealers cautioned that it would take time to see whether a rate cut would really boost the economy since the nine other cuts have done little to turn the economy around so far. "After all, a possible rate cut on Tuesday will come only after the bad economic figures we've seen. It's hard to expect the dollar to advance continuously even if the Fed cuts rates," said Shogo Nagaya, foreign exchange manager at Nomura Trust and Banking.