The euro fell to a two-week low against the dollar after Germany's economy entered its worst recession in at least 12 years, sparking speculation the European Central Bank will cut interest rates.
The 15-nation currency also pared gains against the yen after a German government report showed the biggest contraction over two consecutive quarters since 1996. The yen dropped versus the dollar as intervention by the Reserve Bank of Australia fueled speculation other central banks may follow suit.
``The German GDP figures didn't support the euro and we've had some more bad news for the world economy,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``It looks like this is a worldwide recession and the dollar usually gains from this situation. Euro-dollar will go down further.''
Germany's gross domestic product shrank 0.5 percent in the third quarter after contracting 0.4 percent in the previous three months, the Federal Statistics Office in Wiesbaden said.
Traders increased bets the ECB will reduce its 3.25 percent rate in the first quarter. The implied yield on Euribor futures contracts expiring in March fell to 2.75 percent, from 3.15 percent at the end of last month. The ECB benchmark rate is 0.50 percentage point higher than the Euribor contract yield, compared with a 12-month average of 0.19 percentage point below the futures rate.
The yen fell from two-week highs against the dollar and the euro after the Reserve Bank of Australia intervened to support its currency, fueling speculation Japan may do the same.
The yen declined versus the Australian dollar, after yesterday surging the most in three weeks, as an unidentified spokesman at the RBA confirmed purchases of its own currency. Japan's Finance Minister Shoichi Nakagawa told lawmakers in Tokyo today that abrupt currency moves are ``undesirable'' and a stronger yen hurts domestic stock investors. He said last month Japan may intervene for the first time in four years.
``The yen has partially retraced yesterday's sharp gains driven by heightened fears over the prospect of intervention,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``Those concerns were fueled by both the confirmation that the RBA directly intervened in the market overnight to slow the Australian dollar's decline, and by comments from Japanese Finance Minister Nakagawa.''
The yen rose earlier to a two-week high against the euro, after U.S. Treasury Secretary Henry Paulson's plan to divert bailout money from banks sparked cuts in purchases of higher- yielding assets. Paulson said yesterday he plans to use the second half of the $700 billion Troubled Asset Relief Program, known as TARP, to help relieve pressure on consumer credit, scrapping a proposal to buy devalued mortgage assets from banks.
The Japanese currency will strengthen to 90 yen per dollar in three months as traders shun higher-yielding assets deemed riskier, Goldman Sachs Group Inc. said, revising earlier forecasts. The euro will fall to $1.20 per euro in the same period, Goldman said. The previous three-month projection was for the dollar at 112 yen and $1.45 per euro.
``Deleveraging and funding constraints have likely created a new source of foreign-exchange demand and supply,'' a Goldman team analysts led by New York-based Jens Nordvig wrote in a research note. ``We expect deleveraging patterns to continue into year-end, driving the dollar and yen stronger and putting pressure on higher-yielding currencies.''
The Australian dollar rose after an RBA spokesman confirmed the central bank bought its own currency today.
``The RBA's intervention is most likely designed to prevent hectic moves in the market,'' said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world's largest money manager for institutions. ``The initial reaction is that people will be reluctant to sell other currencies for yen.''
The British pound slumped as recruitment firm Morgan McKinley said job vacancies in London's financial-services industry sank 48 percent in October from a year earlier.