Bloomberg News

Euro Falls to 3-Week Low on Concern Greek Crisis Is Worsening

June 16, 2011

June 16 (Bloomberg) -- The euro fell to a three-week low against the dollar and slid versus the yen as speculation the Greek debt crisis is deteriorating damped demand for the region’s assets.

Europe’s shared currency fell for a second day after Dutch newspaper Het Financieele Dagblad cited European Central Bank Governing Council member Nout Wellink as saying the region’s emergency fund should be doubled. was also dragged lower on concern a reshuffling of Greek Prime Minister George Papandreou’s cabinet will lead to a renegotiation of aid terms. The yen pared gains against the dollar after reports showed U.S. initial claims for unemployment fell more than forecast and housing starts increased in May.

“With all this political uncertainty in Greece, it just creates a whole new dimension,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “The euro is going to continue to be steered by the headlines. Euro-Swiss looks to just keep heading lower.”

The euro fell 0.6 percent to $1.4094 at 8:46 a.m. in New York and reached $1.4074, the weakest level since May 26. The shared currency slid 0.7 percent to 113.92 yen, after touching 113.50, the least since May 16. The euro weakened 1.1 percent to a record 1.19567 Swiss francs before trading at 1.19781. The dollar declined 0.1 percent to 80.87 yen after falling as much as 0.6 percent.

Dollar Gains

The Dollar Index, which measures the greenback against the currencies of its six major trade partners, rose 0.5 percent to 75.983, the highest since May 25. Yesterday, it had its biggest gain since August.

Papandreou will reshuffle his cabinet and seek to win a confidence vote today after attempts to garner opposition support for an austerity plan failed. Police fired tear gas as thousands of demonstrators encircled the Parliament House in Athens yesterday to protest wage cuts and tax increases.

“The market is still quite concerned about Greece,” said Matthew Brady, executive director for foreign exchange at JPMorgan Chase & Co. in Sydney. “It’s going to be a choppy ride for the euro. There’s no doubt about that. I’d prefer to still sell any rallies in euro.”

EU Meets

German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet tomorrow in Berlin, with pressure increasing for the leaders to reach an accord on a rescue package for Greece. European Union finance ministers agreed on June 14 to convene again on June 19 after they failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new plan for Greek aid.

Wellink said the emergency fund for euro-area countries needs to be boosted if private investors are pressured to contribute to additional aid for Greece, Dagblad reported, citing the interview.

One-month implied volatility on options for the euro-dollar rate, rose to the highest since December. The VIX Index, a measure of market volatility, which is known as Wall Street’s fear gauge, closed at 21.32 yesterday, the highest close since March 18.

“If risk aversion continues to pervade markets and we have these ongoing concerns about the situation in Europe, that will continue to see the euro trade heavily,” said Mike Burrowes, a currency strategist at Bank of New Zealand Ltd. in Wellington. “The dollar, the Swiss franc and the yen would be expected to appreciate in that sort of environment.”

The MSCI World Index of equities declined for a second day, losing as much as 1.3 percent.

Aussie, Kiwi

The Australian and New Zealand dollars dropped as stocks fell, sapping demand for higher-yielding assets.

New Zealand’s dollar, known as the kiwi, weakened against all 16 major counterparts monitored by Bloomberg after Finance Minister Bill English said the currency’s strength was hurting the economy.

“The risk-off mood is dominant in the markets because of concerns over Greece and a slowdown in U.S. growth, sending stocks and commodities lower,” said Takuya Kawabata, a researcher in Tokyo at Gaitame.com Research Institute Ltd., a unit of Japan’s largest currency margin company. “In this environment, money wouldn’t find its way into commodity currencies such as the Aussie and kiwi.”

Australia’s currency fell 0.8 percent to $1.0496, and New Zealand’s dollar declined 1 percent to 79.83 U.S. cents.

The Swiss franc appreciated 0.4 percent against the dollar to 84.95 centimes. The central bank kept its main interest rate at 0.25 percent, an outcome predicted by all 26 economists in a Bloomberg survey.

U.S. jobless claims declined by 16,000 to 414,000 in the week ended June 11, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg News projected 420,000 filings, according to the median forecast. The number of people on unemployment benefit rolls and those receiving extended payments decreased.

Work began on 560,000 houses at an annual pace, up 3.5 percent from the prior month and exceeding the 545,000 median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Building permits, a sign of future construction, also increased.

“Initial jobless claims, as long as they’re above 400 it signifies that the labor market remains week, so it’s not such a promising outlook, BNP Paribas’s Nicola said. “It’s positive that we’ve seen an uptick in housing numbers, especially given the previous number. The housing market remains the Achilles heel of the U.S. economy.”

--With assistance from Candice Zachariahs in Sydney and Ronnie Harui in Singapore. Editors: Paul Cox

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

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


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