Tokyo, March 6 (Bloomberg) -- The euro may fall against the dollar after reaching an almost four-year high yesterday on expectations the European Central Bank will cut its key interest rate, reducing returns on euro-denominated deposits. ECB President Wim Duisenberg said on Feb. 22 he no longer expects an economic rebound this year, leading investors to bet on a rate reduction at the meeting of the bank's council members today. Nineteen of the 25 economists surveyed by Bloomberg News expect the bank to pare borrowing costs from the current 2.75 percent, with 14 predicting a cut of half a percentage point. The key rate in the U.S. currently stands at 1.25 percent. The euro was little changed at $1.0960 at 3:19 p.m. in Tokyo. The European common currency rose to as high as $1.1001 yesterday for the first time in almost four years. It hovered at 128.65 yen from 128.63.
``If you move to cut rates, it's negative for the currency,'' said Michael Jansen, market strategist at National Australia Bank in Sydney. The bank expects a quarter percentage point rate cut by the ECB, which may send the euro to as low as $1.0900 per dollar today, he said. Other ECB council members share Duisenberg's concern. Otmar Issing, the bank's chief economist; Ernst Welteke, head of Germany's Bundesbank; Greece's Nikos Garganas; and Tommaso Padoa- Schioppa, a member of the ECB's executive board, said late last month they were concerned about economic growth. Three of them said inflation is tame. The ECB will announce its decision at 1:45 p.m. in Frankfurt and hold a press conference 45 minutes later. Germany's economy stagnated in the fourth quarter, Italy is expanding at the slowest clip in almost a decade and Spanish growth was the slowest in a year, adding to pressure on the ECB to lower interest rates.
Returns
By contrast, currencies of countries where interest rates are higher have gained. The Canadian dollar rose to a 2 1/2-year high yesterday after the Bank of Canada raised the target for overnight loans between banks by a quarter percentage point to 3 percent. The Australian dollar gained yesterday to a near three-year high after the central bank decided to keep its key interest rate unchanged at 4.75 percent. The New Zealand dollar has risen more than 12 percent in the past three months, with its central bank leaving the official cash rate unchanged today at 5.75 percent. The Australian dollar, the New Zealand dollar, the South African rand and the Canadian dollar have each gained more than 7 percent this year as commodity prices rose. Gold for immediate delivery has risen 8.6 percent in the past three months as the threat of military action in the Middle East drove demand for the metal as a haven investment. Australia is the world's third-largest gold producer.
Iraq War
The euro's decline against the dollar may be limited after U.S. Secretary of State Colin Powell said yesterday there is evidence of new arms violations by Iraq and the U.S. reserves ``the option to act with a coalition of willing nations if the Council does not act.'' France, Germany and Russia said they will oppose a new UN resolution authorizing force against Iraq. Chief UN inspector Hans Blix, who said yesterday that the Iraqis have been ``proactive in the last month or so'' in cooperating, is scheduled to report to the Security Council tomorrow. ``War concern is still a factor to weigh on the dollar,'' said Koji Fukaya, chief analyst of the foreign exchange and treasury division at the Bank of Tokyo-Mitsubishi Ltd. ``Even without support from the UN, the U.S. may go to war.'' The dollar may fall to near $1.1 per euro again today, he said.
Support
A U.S.-led attack without the support of all its allies will leave the U.S. to shoulder most of the costs of the war and its aftermath, which may drag on the nation's economy, analysts said. The conflict may slow the economy by eroding consumer confidence and spending and widening the budget deficit. The threat of war may lead some global investors to cut back on the money they invest abroad, weakening the dollar. The currency is likely to decline on any day global investors shift less than $1.4 billion into the U.S. That amount represents the daily outflow of cash from the nation, which imports more than it exports. Treasury Secretary John Snow yesterday said he supports a strong dollar. ``Let me reiterate my support again for the strong dollar,'' he said, during a ceremony at which he and Treasurer Rosario Marin put their signatures on new U.S. bills Snow had told reporters on March 4 that he was ``not particularly concerned'' about the dollar's recent slide, a comment which led to selling of the U.S. currency.
Yen
The dollar was little changed against Japan's currency at 117.38 yen at 3:16 p.m. in Tokyo. The yen may weaken on expectation that Japan may again sell its currency to stem gains which threaten to derail an export-led recovery. The Bank of Japan sold a total of about 1.2 trillion yen ($10.2 billion) in January and February to keep the currency from strengthening. The yen has risen 1.2 percent against the dollar this year. ``Japan's yen selling seems to have continued, which helped prevent the dollar's decline below 117 for now,'' said Tomoko Fujii, a senior economist at Nikko Salomon Smith Barney Ltd. In other trading, the British pound fell to $1.6007 from $1.6030. The dollar was at 1.3308 Swiss francs from 1.3298. //www.quote.bloomberg.com