Investors Betting on Rate Cut in Europe

Investors betting on an interest-rate cut to stimulate European economies pushed the euro to a 3 1/2-year high against the yen and a 1 1/2-week high against the dollar Wednesday.

The European Central Bank is expected to cut rates at a policy meeting today, and strong reports on the U.S. service sector and productivity did little to take the shine off the European single currency.

ECB President Wim Duisenberg bolstered market expectations Tuesday when he said evidence has strengthened since Nov. 7 that inflationary pressures are easing and downside risks to economic growth have not vanished.

“Over the past two weeks, we’ve been factoring a rate cut from the ECB,” said Bob Lynch, currency strategist at BNP Paribas in New York. “While that may have created a little bit of an interest rate problem for the euro ... the market might be focused on future growth prospects.”

A recent Reuters poll showed that 13 out of 28 traders expected the ECB to cut the benchmark refi rate by half a percentage point to 2.75%. Twelve traders predicted a quarter-percentage-point cut to 3%.

In late U.S. trading, the euro was perched above $1, up 0.04 cents from the previous close, but off the day’s highs. The euro reached 125.01 yen, a 3 1/2-year high, before trimming gains to 124.64 yen Wednesday.