Extending Asian session's downtrend, the euro declined to new multi-day lows against the British pound and the Swiss franc after the German newspaper Bild reported today that German government forecast the largest Eurozone economy to shrink this year. While the euro fell from an Asian session's 5-month high against the Japanese yen, it remained down versus the US dollar.

The German government forecast the largest Eurozone economy to contract in the range of 4% to 4.5% this year, the German newspaper Bild reported Tuesday.

Yesterday, the Commerzbank AG had downwardly revised its forecast for the German economy, citing the recent collapse of order intake. The bank now expects the German economy to shrink 6%-7% this year versus an earlier forecast of 3%-4% contraction.

The Essen-based RWI research institute also lowered the GDP estimate for this year. The institute said the German economy is expected to shrink 4.3% in 2009 compared to a 2% decline estimated in December. The RWI forecasts the GDP to expand 0.5% next year. The institute also predicts the budget deficit to increase to 4.7% of GDP in 2010 from 3.5% this year.

Meanwhile, the think tank IMK reportedly estimated real GDP to fall 5% in 2009.

The French February consumer spending and business confidence indicator for March, Euro-zone January current account and the manufacturing PMI report, which were also released today likely influenced the euro.

A report from the French statistical office INSEE showed today that consumer spending dropped 2% in February from the prior month, reversing a 1.7% rise in January. Economists had expected spending to drop 1% in February.

The Eurozone recorded a current account deficit of EUR12.7 billion in January, on a seasonal and working day adjusted basis, larger than a deficit of EUR7.6 billion in December, a report by the European Central Bank said today.

A report by the German Federal Statistical Office said today that exports fell 6% year-on-year in the fourth quarter to EUR233.8 billion. In price-adjusted terms, exports were down 7.8% in the fourth quarter.

French statistical office INSEE said the business confidence indicator remained at 68 in March, at the same level seen in February.

Governing Council member Erkki Liikanen said today that the European Central Bank still has room for adjusting interest rates. The policymaker, who heads the Bank of Finland, made the comment while presenting the latest economic forecasts for the Finnish economy.

It is worth emphasizing that the European Central Bank has not yet used up all its room for maneuver in its interest-rate policy, he said. The rate setter noted that this applied to all key policy rates.

If the recession becomes further prolonged and the downside risks to price stability increase, it will be necessary for the ECB to broaden its arsenal of non-standard measures and extend the duration of the measures. It is important to keep all options open, Liikanen added.

Against the US dollar, the European currency edged down during early deals on Tuesday. At 6:05 am ET, the euro-dollar pair touched a low of 1.3561, compared to 1.3634 hit late New York Monday. If the pair falls further, 1.341 is seen as the next target level.

The single currency that closed Monday's North American session at 0.9358 against the British pound declined to an 8-day low of 0.9205 at 6:05 am ET Tuesday. The next downside target level for the euro is seen around 0.908.

In economic news from UK, the Office for National Statistics said UK's annual inflation accelerated to 3.2% in February from 3% in January. Economists had expected consumer price inflation to slow to 2.6%. Month-on-month, consumer prices were up 0.9%, faster than a 0.3% rise expected by economists.

As the inflation remained more than one percentage point above the target, Bank of England Governor, Mervyn King wrote a further open letter to the Chancellor of the Exchequer. King expects sharp decline in CPI inflation since its peak in September to resume in the coming months.

UK lenders approved 28,179 mortgages for house purchase in February, a decline of 30.6% year-on-year, the British Bankers' Association said Tuesday. The number was 24,278 in January, which was revised from an initial 23,376.

Against the Swiss franc, the 16-nation currency edged down during Tuesday's early deals. At 6:05 am ET, the euro-franc pair slipped to a 4-day low of 1.5266, compared to Monday's closing value of 1.5337. On the downside, 1.515 is seen as the next target level for the pair.

The euro that rose to a 5-month high of 134.54 against the Japanese yen in Asian deals weakened thereafter. At 6:05 am ET, the euro-yen pair was quoted at 132.98 with 129.8 seen as the next target level. The pair closed yesterday's deals at 132.20.

The board members of the Bank of Japan suggested that the Japanese economy may begin to recover from the current recession in the second half of this year at the earliest, minutes from the February 18 and 19 monetary policy meeting revealed today.

The members also said that they might need to cut their view of Japan's long-term growth - especially since there was more demand than expected for BoJ funds. The board also said that an exit strategy was needed for the series of economic stimulus measures.

Across the Atlantic, today will be a busy day including a testimony on AIG from Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner to the U.S. House Financial Services Committee.

AIG has come under severe attack for awarding multimillion-dollar bonuses to executives following a $180 billion bailout from the U.S. government.

Markets will also receive information on the Richmond region manufacturing sector. The Richmond Fed manufacturing index is expected to remain unchanged at -51 in March.

The Federal Housing Finance Agency will also release its house price index for January. House prices are expected to fall 0.9% against a 0.1% increase in December.

In the afternoon, James Bullard, President of the Federal Reserve Bank of St. Louis, will speak in London.

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