By Kosuke Goto and Stanley White
April 3 (Bloomberg) -- The euro fell from a five-week high against the yen on speculation a government report will show European consumers are curbing spending.
The currency also weakened against the dollar as the yield advantage German two-year bonds offer over similar-dated Treasuries was near the lowest in over a week. The ECB has room to lower borrowing costs as the region's economic growth is slowing ``sharply,'' the International Monetary Fund said yesterday in a background paper obtained by Bloomberg News.
``The euro is poised to fall significantly,'' said Akira Takei, who helps oversee the equivalent of $32.9 billion as general manager of international fixed income investment at Mizuho Asset Management Co. in Tokyo. ``A slowdown in the U.S. will eventually filter through to Europe. The ECB will be forced to cut.''
The euro declined to $1.5646 at 12:33 p.m. in Tokyo, from $1.5686 in New York yesterday, when it rose 0.5 percent. It also slid to 160.26, from 160.56 yesterday, when it touched 160.74, the highest level since Feb. 28. Against the British pound, the euro slid to 78.74 pence from 78.92 pence. The dollar traded at 102.44 yen from 102.36 yen yesterday, when it rose to 102.84, the highest level since March 12.
Europe's single currency may fall to $1.40 in six months, Takei said.
European retail sales grew 0.2 percent in February, slower than a 0.4 percent gain in the previous month, according to a Bloomberg survey. The European Union's statistics office will release the report later today in Luxembourg.
The yield advantage of German two-year debt over U.S. bonds of a similar maturity today was 167 basis points, within a basis point of the lowest since March 24.
Consumer Spending
The worst U.S. financial crisis since the Great Depression has spread to Europe and ``the ECB can now afford some easing of the policy stance,'' the IMF said in the document. The fund lowered its forecast for 2008 euro-region economic growth to 1.3 percent from 1.6 percent, according to the document. That would be the slowest expansion since 2003.
The ECB left its benchmark interest rate on hold at a six- year high of 4 percent last month.
The euro may fall to $1.5341 by the end of next week provided it weakens below $1.5599, said Kengo Suzuki, a currency strategist at Shinko Securities Co., citing technical charts.
The first level of so-called support at $1.5599 represents the common European currency's average price for the past 20 days, Tokyo-based Suzuki said. Second support at $1.5341 is the neckline of a pattern known as a double top, which forms when a currency makes two successive peaks of about the same height. The neckline passes through the lowest point of the double top. Support is a level where buy orders may be clustered.
U.S. Service Industries
Any gains for the dollar may be limited by speculation a U.S. report today will show U.S. service industries shrank every month in the first quarter, adding to signs of a slowing economy.
The currency weakened versus the South Korean won and the Canadian dollar after Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a U.S. recession is possible.
The dollar fell to C$1.0159 from C$1.0163. It also weakened to 974.35 against the won, from 975.10 in New York. The U.S. currency traded at $1.9864 per British pound from $1.9874. It was at 1.0123 versus the Swiss franc from 1.0086.
Dollar Index
The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, was at 72.378, from 72.259 yesterday. It dropped to a record of 70.698 on March 17, when the dollar touched $1.5903 per euro, the lowest level since the European currency debuted in 1999.
``With the Fed keeping low rates, the dollar will remain weak against higher-yielding currencies,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, a unit of France's second-largest bank by market value.
The dollar may fall to $1.5720 a euro today, Saito forecast.
The Institute for Supply Management's non-manufacturing index probably was 48.5 last month, compared with 49.3 in February and 44.6 in January, according a Bloomberg News survey. Readings less than 50 signal contraction.
Bernanke told lawmakers yesterday that the economy will not grow much and ``could even contract slightly in the first half of 2008.''
Traders see 88 percent odds the Fed will cut the benchmark lending rate by a quarter-percentage point at its next meeting April 30, from 76 percent a day earlier, according to futures contracts on the Chicago Board of Trade. The odds of a cut of a half-percentage point are 12 percent, from 24 percent yesterday.
Carry Trades
The yen has dropped against all 16 of the most-traded currencies since April 1 after Lehman Brothers Holdings Inc. and UBS AG said they were raising $19 billion to replenish their capital, encouraging so-called carry trades.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them. The risk is that currency moves erase those profits.
The yen is a funding currency for carry trades because Japan's benchmark interest rate is 0.5 percent, the lowest of major economies. That compares with 4 percent for the 15 nation's that share the euro and New Zealand's 8.25 percent.
One-month implied volatility for the yen fell to 15.08 percent today, down from 16.95 percent on March 31. Traders quote the gauge of expectations for future currency swings as part of pricing options.
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