Bloomberg News

Euro Pares Drop Against Dollar as EU Works on Greece Debt Crisis

June 16, 2011

June 16 (Bloomberg) -- The euro pared its decline against the dollar after reaching a three-week low amid speculation an agreement between the European Union and the International Monetary Fund may allow Greece to avoid a debt default.

Europe’s shared currency erased most of its earlier declines after European Union Economic and Monetary Commissioner Olli Rehn said Greece will be able to get funding from the EU and International Monetary Fund in July as long as it enacts budget cuts. The IMF backed Rehn in a statement. The yen strengthened against the dollar after a report showed an unexpected slowdown in Philadelphia area manufacturing.

“The slight improvement in risk was generated by a perception that Greece will be given some breathing room by the EU in which they will provide funding for upcoming July funding dates,” said Alan Ruskin, global head of Group-of-10 foreign- exchange strategy at Deutsche Bank AG in New York.

The euro fell 0.1 percent to $1.4161 at 11:39 a.m. in New York and reached $1.4074, the weakest level since May 26. The shared currency slid 0.5 percent to 114.24 yen, after touching 113.50, the least since May 16. The euro weakened 1.2 percent to a record 1.19466 francs before trading at 1.20372.

The dollar declined 0.3 percent to 80.69 yen after falling as much as 0.6 percent.

Option View

Implied volatility for one-week euro-U.S. dollar options surged as much as 294 basis points to 16.81 percent, the highest level since November 2010. It rose 349 basis points yesterday, the most since May 2010. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

The franc appreciated 0.4 percent against the dollar to 84.95 centimes and strengthened against all of its 16 most- traded counterparts. The central bank kept its main interest rate at 0.25 percent, an outcome predicted by all 26 economists in a Bloomberg survey.

The franc is the most overvalued it’s even been versus the euro, based on models, Thomas Stolper, chief currency strategist at Goldman Sachs Group Inc., said on a conference call.

Greek Prime Minister George Papandreou will reshuffle his cabinet and seek to win a confidence vote today after attempts to garner opposition support for an austerity plan failed.

Amid Riots

As riots broke out in Athens and the Greek government teetered, EU Commissioner Rehn said “close contact” with the IMF made him confident of an accord at a weekend crisis meeting to pay out 12 billion euros ($17 billion) in July as long as Greece enacts new budget cuts.

Greece’s immediate concern is to obtain 8.7 billion euros from Europe and 3.3 billion euros from the IMF in July, promised as part of last year’s precedent-setting aid package to stave off the euro area’s first default.

“Progress is being made in the discussions to ensure the full financing of the program, and we anticipate a positive outcome on this at the next Euro-group meeting,” Caroline Atkinson, a spokeswoman for the IMF, said in an e-mailed statement today.

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.

Euro Trade

“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.

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.

Australia’s currency fell 0.3 percent to $1.0549, and New Zealand’s dollar declined 0.5 percent to 80.24 U.S. cents.

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.

Housing Starts

Housing starts in the U.S. increased more than forecast in May, led by a jump in the West as other parts of the country languished. Manufacturing in the Philadelphia region unexpectedly shrank in June for the first time in nine months, raising the risk the industry may contribute less to the economic expansion.

“Initial jobless claims, as long as they’re above 400 it signifies that the labor market remains weak, so it’s not such a promising outlook,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “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.”

The Dollar Index, which measures the greenback against the currencies of its six major trade partners, rose 0.1 percent to 75.637 and touching the highest since May 25. Yesterday, it had its biggest gain since August.

--With assistance from Allison Bennett in New York, Candice Zachariahs in Sydney and Ronnie Harui in Singapore. Editors: Paul Cox, Dave Liedtka

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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