Euro weakens versus yen after Moody's cuts Italy's debt rating

The euro approached a 10-year low versus the yen after Moody's Investors Service cut Italy's debt ranking and amid speculation a slowing economy will prompt the European Central Bank to expand stimulus at a meeting tomorrow.

The 17-nation currency fell against all except three of its 16 most-traded peers after a spokesman for European Union Economic and Monetary Commissioner Olli Rehn said there's no concrete plan right now to recapitalize banks. European countries with debt ratings below the top Aaa level may see their creditworthiness reduced, Moody's said. The Dollar Index rose earlier after Federal Reserve Chairman Ben S. Bernanke signaled willingness to step up measures to spur U.S. growth.

“We're seeing the market go back to its default euro bearishness,” said Elizabeth Gregory, a market strategist in Geneva at Swissquote Bank SA, a unit of financial and trading- services company Swissquote Group. “The market is focusing on the possibility of rate cuts tomorrow. There's enough angst circulating in the euro zone for people to think there might be a 25-basis-point cut.” Gregory said she doesn't expect the ECB will lower borrowing costs tomorrow due to a “disjointed lack of consensus amongst policy makers.”

The euro depreciated 0.3 percent to 102.24 yen at 8:08 a.m. in New York, after dropping to 100.76 yen yesterday, the weakest level since June 2001. The currency declined 0.1 percent to $1.3339, after falling as much as 0.7 percent. The dollar slipped 0.2 percent to 76.66 yen.

Italy Cut

Moody's cut Italy's rating three levels to A2 from Aa2, citing concern the government will struggle to reduce the region's second-largest debt amid weak growth. Standard & Poor's downgraded Italy on Sept. 20 for the first time in five years.

“All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings,” Moody's said in a statement yesterday. “Consequently, Moody's expects fewer countries below Aaa to retain high ratings.”

Traders increased bets the ECB will lower borrowing costs tomorrow to fuel growth. Eleven of 52 economists surveyed by Bloomberg predicted the central bank will cut its benchmark rate by at least a quarter-percentage point from the current rate of 1.5 percent. The others expect no change.

Stock Gains

The euro pared earlier declines as European stocks rose amid speculation European policy makers are looking at measures to shield banks from the region's sovereign-debt crisis.

The Financial Times quoted Rehn as saying there's an “increasingly shared view” the region needs a coordinated approach to halt the debt crisis.

“The euro has been moving higher throughout the morning,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “The FT report boosted U.S. equities, and European markets took heart from that. European equities are up, so it's ‘normal' for the euro to track higher in those circumstances.”

Euro-area services and manufacturing output contracted more than estimated in September, a report today showed. A composite index based on a survey of purchasing managers in both industries fell to 49.1 in September from 50.7 in the previous month, Markit Economics said. That is less than an initial estimate of 49.2 published on Sept. 22.

‘Looking Softer'

Europe's economy “is looking softer on some key measures,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “They will cut rates on Thursday. We'll see the euro more likely to be lower than higher from current levels.”

The Fed can give more information about its pledge to keep rates low at least through mid-2013, reduce the rate paid on banks' reserve deposits or purchase more securities, Bernanke said yesterday in testimony to Congress's Joint Economic Committee, reiterating options he mentioned in July.

“Bernanke actually helped the U.S. dollar slightly by not sounding as though he's in a hurry” to implement a third round of quantitative easing, said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., Australia's second-largest lender. “Momentum is definitely moving back in the dollar's favor.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained as much as 0.4 percent before trading little changed at 79.018.

The greenback gained 7.3 percent in the past month, the second-best performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Only the yen appreciated more in the same period, rising 7.7 percent.