Bloomberg News

Euro Drops for First Time in Month on Reduced ECB Rate Outlook

June 11, 2011

June 11 (Bloomberg) -- The euro fell versus the dollar for the first time in almost a month after the European Central Bank revised its inflation forecast, signaling the pace of interest- rate increases this year may slow.

The shared currency depreciated this week as ECB President Jean-Claude Trichet resisted calls for Greek bondholders to contribute to financial aid for the nation. The dollar rose for the first time in four weeks against its six major trading partners and the yen gained against the greenback for a third week as stocks and commodities fell, driving investors to haven assets. Retail sales in the U.S. may have dropped in May, according to a survey before the report next week.

“The dollar is gaining on the euro, in general, because of risk aversion,” said John Doyle, a strategist in Washington at currency-trading firm Tempus Consulting Inc. “Trichet said that he was not in favor of haircuts on Greek debt, which is playing into the euro weakness.”

The euro dropped 2 percent to $1.4347 per dollar, from $1.4635 on June 3. It weakened 1.9 percent to 115.24 yen, from 117.48. The dollar was little changed at 80.32 yen.

IntercontinentalExchange Inc.’s Dollar Index, which measures the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, strengthened 1.4 percent to 74.833 from 73.783 last week.

Futures Shift

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 yesterday and data compiled by Bloomberg.

The euro fell after Trichet signaled June 9 the central bank may raise interest rates in July while reiterating that inflation will fall below its 2 percent limit next year. 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 four basis points to 1.93 percent yesterday, as traders reduced bets policy makers will boost rates. Investors now expect the central bank to increase interest rates by 70 basis points over the next year, down from 81 on June 7, according to a Credit Suisse Group AG index based on swaps.

ECB Watch

“Because Trichet did not give the market any further indication of a series of rate hikes or that inflation had become such a problem he would have to step up the frequency, the market was disappointed to a certain extent,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. “There was nothing really to provide the stimulus for further euro buying.”

Trichet also said the central bank is not in favor of restructuring or losses with regard to Greek bondholders and wants to avoid any credit event or default. German Finance Minister Wolfgang Schaeuble said in a speech June 9 that bondholders should assume a “fair” share of further Greek aid.

The yen rose against the dollar after Federal Reserve Chairman Ben S. Bernanke said in a speech this week that the central bank should maintain record monetary stimulus to boost a “frustratingly slow” economic recovery.

Bernanke and his fellow policy makers plan this month to complete a $600 billion bond purchase program, and they’re discussing the tools they’d use to withdraw stimulus, according to minutes of their meeting in April. The Fed’s target rate for overnight lending between banks has been held at zero to 0.25 percent since December 2008.

Shopping Guide

Retail sales in the U.S. fell 0.5 percent in May, the first drop since June, according to the median estimate of 63 economists in a Bloomberg News survey. The Commerce Department will release the report June 14.

Japan’s Finance Minister Yoshihiko Noda said in Tokyo June 6 that he’s monitoring the yen’s appreciation while conceding that the market’s view on the U.S. economy was likely behind its moves. It was the first time in a month Noda said he’s watching the markets, a comment that Japanese officials have made in the past as a signal they may intervene in the currency market. The yen reached 79.70 June 8, the lowest level since May 5.

New Zealand’s dollar reached a record versus its U.S. counterpart after the Reserve Bank of New Zealand said interest rates will rise within two years. The central bank left its benchmark rate unchanged at 2.5 percent, a decision that was predicted by all 15 economists surveyed by Bloomberg News.

Investors now expect the central bank to increase the benchmark rate by 63 basis points over the next 12 months, up from 56 basis points June 9, according to a Credit Suisse Index.

The Standard & Poor’s 500 Index fell 2.2 percent, dropping for a sixth straight week, matching a stretch of losses ending in July 2008. Oil dropped 0.9 percent this week to $99.29 a barrel.

Sweden’s krona and Norway krone were the worst performing currencies among the 16 majors this week. The krona dropped 3.2 percent to 6.3273 per dollar and Norway’s krone fell 2.9 percent to 5.4852 per dollar.

--Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; 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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