Bloomberg News

Euro Falls, Set for Weekly Drop, on Rate Increase Speculation

June 10, 2011

June 10 (Bloomberg) -- The euro declined against the dollar for the third day, extending the first weekly drop in almost a month, as European Central Bank President Jean-Claude Trichet signaled a slowing pace of interest-rate increases this year.

The Dollar Index rose for a third day, the longest winning streak since February. Sweden’s krona was the worst performer against the dollar as falling stocks and commodities weighed on growth-linked currencies. The yen climbed against all of its most-traded counterparts as investors sought the perceived stability of the currency.

“The inflation forecasts are definitely playing into the euro negativity as it suggests that a third rate hike this year may be off the table, which had previously been priced in,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “We’re seeing risk assets across the board come off pretty aggressively. Crude oil is falling and stocks are negative.”

The euro has lost 2 percent this week falling to $1.4347 at 5 p.m. in New York, from $1.4510 yesterday. The yen was little changed today at 80.32 per dollar after sliding 0.6 percent yesterday. It earlier reached 79.97, strengthening above 80 for a fifth straight day, the longest streak since at least 1971, according to data compiled by Bloomberg.

Futures Shifts

Net dollar short positions against the euro, yen, pound, Australian dollar, Canadian dollar and Swiss franc rose for a second week and reached 163,309 in the five days ended June 7, according to the Commodity Futures Trading Commission figures released today (yesterday) and data compiled by Bloomberg.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, advanced 0.9 percent to 74.835, from 74.192, in the longest string of gains since Feb. 14. The gauge is weighted 57.6 percent to movements in the euro.

The ECB said inflation next year will accelerate between 1.1 percent and 2.3 percent, compared with an earlier forecast of 1 percent to 2.4 percent.

Euribor futures rose, pushing the implied yield on the March 2012 contract down 10 basis points to 1.87 percent, as traders reduced bets policy makers will boost rates. Investors now expect the central bank to increase interest rates by 67 basis points over the next year, down from 81 on June 7, according to a Credit Suisse Group AG index based on swaps.

Trichet Position

Speaking in Frankfurt today, Trichet said euro-area finances “as a whole are sound.” Asked yesterday if the ECB would roll over its own holdings of Greek government bonds if private investors agreed to do so, Trichet said that is “certainly not our intention.” German Finance Minister Wolfgang Schaeuble stepped up his calls for bondholders to assume a “fair” share of further Greek aid, pitting Europe’s biggest against the central bank.

“The main concern is the ambiguity of the comments coming out of the ECB and some politicians,” said Dean Popplewell, an analyst at the online currency-trading firm Oanda Corp. in Toronto. “The euro continues to falter as the sovereign debt worries remain at the forefront. With that, individuals’ and investors’ risk tolerance certainly depreciates.”

The dollar rose against all its major counterparts excluding the yen. The greenback has gained 1.5 percent this week, according to the Bloomberg Correlation-Weighted Indexes. The dollar is still the worst-performer in the past year, falling 16 percent, according to the index.

Import Prices

Growing demand from economies in Asia and Latin America, paired with a weaker dollar, has pushed up the cost of goods imported into the U.S. The import-price index unexpectedly rose in May by 0.2 percent, compared with the forecasted decrease of 0.7 percent.

The Japanese currency rose against higher-yielding currencies as stocks and commodities declined, boosting demand for the yen as a refuge.

The Standard & Poor’s 500 index fell 1.4 percent, completing its sixth weekly loss. The Thomson Reuters/Jefferies CRB Index of raw materials declined 0.2 percent this week. The yen gained 0.9 percent to 84.64 per Australian dollar and was rose 0.5 percent to 65.99 per New Zealand dollar, today.

Sweden’s krona weakened after ECB policy makers yesterday revised their forecasts for economic growth. The Frankfurt-based central bank sees gross domestic product in the euro region expand by 0.6 percent to 2.8 percent in 2012, compared with a previous range of 0.8 percent to 2.8 percent.

Sweden’s krona depreciated 1.5 percent to 6.3273 per dollar. It weakened 0.3 percent versus the euro to 9.0800.

Crude oil fell below $100 a barrel, sliding as much as 3.2 percent to $98.63 in New York, pulling down the currencies of oil producers.

Norway’s krone fell 1.2 percent to 5.4852 per dollar. The Canadian dollar dropped 0.7 percent to 97.99 cents versus the U.S. currency.

--With assistance from Yoshiaki Nohara in Tokyo, Seyoon Kim in Seoul and Keith Jenkins and Svenja O’Donnell in London. Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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