Euro Set for Worst Week Since Start of February on Greece Woes
March 18, 2010, 10:56 PM EDTBy Candice Zachariahs and Ron Harui
March 19 (Bloomberg) -- The euro is set for its biggest weekly loss since the start of February as concern Greece will fail to secure financial assistance from the European Union damped demand for the currency.
The euro slid this week versus 15 of its 16 major peers as Greece’s prime minister set a deadline for an aid mechanism from the European Union while Germany said the International Monetary Fund may be the better option. The Swiss franc traded near a 17- month high against the euro as an official said policy makers can’t prevent the currency’s advance indefinitely. The yen weakened today after U.S. economic data sparked gains in stocks, curbing demand for the currency as a refuge.
“Reports on inter-governmental relations between Greece and Germany will be the major driver of the euro, and they’re likely to keep bickering,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “We can see euro falling down to the low $1.30s” within a week.
The euro traded at $1.3620 as of 11:49 a.m. in Tokyo after yesterday dropping 1 percent to $1.3608 in New York, the steepest drop on a closing basis since Feb. 17. The currency is set for a five-day loss of 1.1 percent, the biggest since the week ended Feb. 5. It bought 123.21 yen from 122.99 yen. The dollar gained to 90.45 yen from 90.39 yen.
Greek Prime Minister George Papandreou said yesterday he may turn to the IMF to overcome his nation’s debt crisis unless EU leaders agree to set up a lending facility at a summit March 25-26. The IMF option has been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who said it would show the EU can’t solve its own crises.
Merkel on IMF
Chancellor Angela Merkel, faced with a German public unwilling to foot the bill, told parliament on March 17 the IMF may be the only answer to Greece’s fiscal problems. Greece needs to raise about 10 billion euros ($14 billion) to refinance bonds due on April 20 and May 19. Papandreou said Greece can’t afford to keep paying current market rates.
“Don’t underestimate the game of chicken that’s being played right now between Greece, the EU and the IMF,” Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., told Bloomberg Radio yesterday. “I suspect at the end of the day, the IMF will come in, but it’s going to be a bumpy process.”
European equity funds posted net outflows of $1.06 billion in the week ended March 17, the biggest withdrawals since May 2009, EPFR Global said today in a statement.
U.S. Outlook
The dollar was near a one-week high against the euro as a report showed that manufacturing in the Philadelphia region expanded in March at the fastest pace this year. A separate government report showed initial unemployment claims dropped by 5,000 last week.
The greenback was also bolstered as economists said the Federal Reserve may raise the discount rate, charged on direct loans to banks, before the start of the next two-day meeting of the Federal Open Market Committee on April 27.
“The improved U.S. economic outlook and very modest policy tightening outlook continue to highlight the U.S.’s relative economic growth outperformance,” Emma Lawson, a currency strategist in London at Morgan Stanley, wrote in a research note yesterday. “We retain our long dollar-yen and short euro-dollar positions.”
Japan’s Nikkei 225 Stock Average rose 0.7 percent today, while the MSCI Asia Pacific Index climbed 0.4 percent. The yen retreated against 12 of 16 major peers.
SNB Purchases
The franc strengthened 1.1 percent against the euro this week, its biggest five-day gain since December 2008, as Swiss National Bank Governing Board member Jean-Pierre Danthine said yesterday policy makers can’t keep borrowing costs near zero for an extended period of time and maintain purchases of foreign currencies indefinitely.
“Households and firms should prepare themselves for a return, sometime in the future, to a world of higher interest rates, with exchange rates being guided by market forces,” he said in Zurich yesterday.
The SNB, led by Philipp Hildebrand, has purchased foreign currencies over the past year to combat the threat of deflation and support an export-led recovery. The Swiss currency traded at 1.4403 per euro after touching 1.4356 yesterday, the strongest level since October 2008.
“The theme of tightening of policy continues to strengthen with the SNB’s Danthine saying that households and firms must prepare for higher rates in the future,” analysts led by Hans- Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note dated today. “The euro-swiss should continue to trend lower.”
--With assistance from Keith Jenkins in London. Editors: Rocky Swift, Nicholas Reynolds
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
