The euro declined from near its strongest level in six weeks against the dollar on speculation the region's central bank will keep interest rates at a record low amid signs the global recovery is slowing.
The yen traded near a seven-month high against the dollar before reports today and tomorrow that economists said will show European investor confidence weakened and US service industries expanded at a slower pace.
"The ECB will be forced into a lower-for-longer stance on its monetary policy," said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada.
"We are still very bearish on the euro and expect a move towards $1.15 by the end of the year."
The euro fell 0.3 per cent to $1.2534 as of 7.14am in London from $1.2566 on July 2nd, when it reached $1.2612, the most since May 21st. The yen traded at 87.95 per dollar from 87.75 last week in New York, after climbing to 86.97 on July 1, the strongest since December 2nd. It bought 110.24 per euro from 110.27.
The European Central Bank will leave rates unchanged when policy makers meet on July 8th, according to a Bloomberg News survey, as efforts to trim budget shortfalls in the region damp growth prospects.
The central bank will begin raising rates in the second quarter of 2011, according to the median estimate of economists.
ECB president Jean-Claude Trichet pressed governments to trim their budget deficits this month, saying such action would improve the confidence of consumers and investors.
"We are in a period where we have to manage budgets very tightly," Mr Trichet told journalists yesterday.
An index measuring sentiment in the 16-nation region declined to minus 5 in July from minus 4.1 in June, Limburg, Germany-based Sentix is forecast to say today.
"There are lingering worries that austerity measures will harm European growth," said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. "We're still looking to sell the euro on rallies."
Losses in the yen were tempered as futures traders increased bets for a second week that Japan's currency will gain, figures from the Washington-based Commodity Futures Trading Commission showed.
The dollar fell to its weakest level in seven months against the yen on July 1st as traders added to bets the Federal Reserve will keep its benchmark rate near zero on signs the economy is slowing.
Futures on the CME Group Inc. exchange show a 34 percent chance the Fed will hold its benchmark rate between zero and 0.25 per cent through its April 2011 meeting, up from 12 per cent odds
a month earlier.
US markets are shut today for the Independence Day holiday.
Bloomberg