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Euro Weakens Below $1.32 First Time in Six Weeks as Output Drops

Feb. 21 (Bloomberg) -- The euro declined below $1.32 for the first time in six weeks after an industry report showed services and manufacturing in the region shrank at a faster pace in February than economists forecast.

The 17-nation currency fell for a third day versus the yen on speculation the European Central Bank will have to keep borrowing costs lower for longer to help spur a recovery. The Dollar Index rose to a five-month high before the release of U.S. leading indicators and a regional manufacturing gauge that may add to evidence the economy is gathering momentum. The pound rose the most in two weeks against the euro.

“The outlook in the euro area remains weak,” said Melinda Burgess, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “ECB policy will have to be looser and this will weigh on the euro.”

The euro fell 0.7 percent to $1.3191 at 8:17 a.m. New York time after dropping to $1.3168, the lowest level since Jan. 10. The common currency dropped 1.1 percent to 122.97 yen. The yen strengthened 0.4 percent to 93.19 per dollar.

RBS forecasts the euro will decline to $1.30 by the end of March and as low as $1.19 over the coming year, Burgess said.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback versus the currencies of six U.S. trading partners, gained 0.4 percent to 81.348 after rising to 81.508, the highest level since Sept. 5.

Industrial Output

A composite index of factory and services output in the 17- nation currency bloc fell to 47.3 from 48.6 in January, London- based Markit Economics said. Economists forecast a reading of 49, according to the median of 22 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

The pound gained 0.9 percent versus the shared currency to 86.40 pence after adding as much as 1 percent, the most since Feb. 7. Sterling gained 0.2 percent to $1.5264 after falling to $1.5132, the weakest since July 2010.

The euro has trimmed its gain so far this year to 1.9 percent, according to a gauge of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar added 2 percent, while the yen slumped 5.8 percent.

The dollar advanced as Congress and the White House try to reach an agreement to stop $1.2 trillion in automatic cuts in federal spending during the next nine years beginning March 1. The Congressional Budget Office estimates the measures would reduce economic growth by 0.6 percent this year, enough to eliminate 750,000 jobs.

Meeting Minutes

Minutes of the Federal Reserve’s February policy meeting showed some Federal Open Market Committee officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved.”

Officials were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, according to the minutes released yesterday in Washington. Some said an earlier end to purchases might be needed and others warned against a premature withdrawal of stimulus, the minutes showed.

The yen advanced all 16 of its major peers as former Bank of Japan Deputy Governor Kazumasa Iwata and Asian Development Bank President Haruhiko Kuroda were seen as the leading candidates to head the central bank, the Mainichi newspaper reported today, without citing anyone.

‘Monetary Easing’

Iwata would be the most yen-bearish candidate because he advocates foreign-bond purchases, according to a note from Citigroup Inc. this week.

“I expect the yen to weaken in the next 12 months,” said Hiroshi Yoshida, a senior portfolio manager in Tokyo at MassMutual Life Insurance Co., which manages the equivalent of $18 billion. “The BOJ will continue to expand monetary easing regardless of whoever becomes the next governor.”

The Deutsche Bank Currency Volatility Index, a measure of the market’s expectation of future currency movements, rose to 9.5 percent, the most since August.

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