Euro Extends Drop to Seven Month Low After France Rejects EU Constitution

(Bloomberg) -- The euro fell to a seven-month low against the dollar and headed for its biggest monthly loss since January on concern the European Union is being derailed by opposition to a proposed constitution.
The Netherlands is predicted tomorrow to follow the decision of French voters to reject a European treaty, throwing into doubt the future of the project. The euro is down 8 percent this year as growth in the 12-nations that share the single currency lags behind that of the U.S. European Central Bank policy makers will probably cut their growth estimates when they meet June 2.
``I'd be looking for levels to sell the euro,'' said Lawrie Dryden, head of currency and asset allocation in Sydney at State Street Global Advisors, which manages about $31.7 billion of funds. ``There are real concerns about growth in Europe. The man in the street is feeling his plight is being ignored by the politicians, so the votes are a popular reaction.''
Against the dollar, the euro fell to $1.2388 at 10:28 p.m. in Tokyo, the lowest since October 15, from $1.2475 late in Asia yesterday, according to electronic currency-dealing system EBS. The euro has lost 3.7 percent this month. The euro will probably decline toward the $1.20 area within a month, Dryden forecast.
Japanese Jobless Rate Falls
The yen also advanced to an almost three-month high against the euro after government reports showed the Japanese jobless rate fell to the lowest in more than six years and household spending rose. The economic reports improve prospects for a recovery in the world's second-biggest economy.
The yen climbed to 134.10 against the euro from 134.80 immediately before the report was released and 134.66 yesterday. Against the dollar it traded at 108.20 from 108.00 yesterday.
The unemployment rate fell to 4.4 percent in April from 4.5 percent the previous month, the lowest since December 1998. Spending by households headed by salaried workers increased 3.6 percent from March, the first gain in three months, a separate government report showed.
``There are a number of reasons why you'd be supportive of the yen,'' said Greg Gibbs, a Sydney-based senior currency strategist at RBC Capital Markets, in an interview. ``If you look relative to Europe the numbers out of Japan have been looking a lot better.''
The currency last week halted a three-week decline after government reports showed retail sales and exports rose more than expected. The yen is down 4.9 percent this year on signs growth in the U.S. is outpacing that of Japan.
Dutch Referendum
A survey of 16,850 Dutch people yesterday found 53.2 percent of voters will reject the constitution, three days after France voted 55 percent to oppose it.
The constitution, which creates a European president and foreign minister for the first time and gives more power to the European Parliament, must be ratified by all 25 members of the European Union by November 2006 in order to take effect.
``Investors worry that rejection of a Federal system for Europe will drastically reduce the likelihood of much needed further reforms to improve economic growth,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``Fallout could include pressure on the ECB to cut interest rates.''
ECB policy makers may lower their 2005 growth estimate for the third time in six months when they meet on June 2, according to the median forecast of 21 economists polled by Bloomberg News. They will keep the benchmark interest rate at 2 percent, all 37 economists in a separate survey predicted.
The Federal Reserve's interest-rate target for overnight loans between banks is 3 percent.

To contact the reporter on this story:
Rodrigo Davies in London at rdavies13@bloomberg.net