Bloomberg News

Euro Weakens on Delayed Agreement on Greek Loan, Growth Concern

June 20, 2011

June 20 (Bloomberg) -- The euro fell against the dollar for the first time in three days after European governments failed to agree on releasing a loan payment to spare Greece from default on its debts.

Europe’s shared currency declined for a fourth day versus the yen, its longest losing streak in six weeks, before the Greek parliament resumes debating a motion of confidence in Prime Minister George Papandreou’s government. The dollar and the Swiss franc rose versus most major peers while the Australian and New Zealand dollars and Norwegian krone dropped, as falling stock markets damped demand for the higher-yielding assets.

“The resolution to the Greek issue is quite a distance away,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. “In the meantime, you just throw good money after bad and as policy makers try to find a middle ground between two extremes. The market becomes increasingly suspect of any near-term resolutions and constant disappointments.”

The euro declined 0.3 percent to $1.4268 at 8:50 a.m. in New York. The shared currency fell 0.1 percent to 114.46 yen from 114.52, extending last week’s 0.6 percent drop. The dollar gained 0.2 percent to 80.23 yen from 80.05.

‘Buy-on-Dips’

“We think the euro is going to be oversold by all this continued negative news out of Greece,” Woolfolk said. “I’m a buy-on-dips type of guy.”

Australia’s dollar slid 0.8 percent to $1.0539. Its New Zealand counterpart lost 0.6 percent to 80.77 U.S. cents. The krone fell 0.5 percent to 5.5520 per U.S. dollar.

Papandreou kicked off a three-day debate yesterday on a confidence motion in his government. He called for the vote last week after opposition parties rejected pleas for national consensus and the prime minister’s handling of the crisis led to defections from his party. Antonis Samaras, leader of New Democracy, the largest opposition party in Greece, repeated his call for elections.

Greece needs parliamentary approval of a 78 billion-euro ($111 billion) package of budget cuts to ensure the payment of a fifth loan under last year’s 110 billion-euro bailout.

Greek Reminder

“We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters today after chairing a seven-hour meeting.

“Our inclination would be to sell into euro rallies,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “We’re not at all convinced that Greece has the political will to deliver everything that its lenders want from it.”

Investors should sell the euro on gains above $1.43 on concern the Greek government is “a little too precarious,” Westpac’s Callow said. The median forecast of 49 analysts polled by Bloomberg News is for the euro to fall to $1.41 by December.

The yen snapped two days of gains versus the dollar after the Finance Ministry said Japan’s exports fell 10.3 percent in May from a year earlier, adding to signs the economy may struggle to recover from a March 11 earthquake and tsunami that damaged a nuclear power station at Fukushima, north of Tokyo. The median estimate of economists surveyed by Bloomberg News was for an 8.4 percent drop.

‘Yen Weakness’

“There’s a little bit of yen weakness following those export numbers,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong.

The dollar strengthened as declines in commodities and stock markets around the world boosted demand for safer assets. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.2 percent to 75.171.

The MSCI World Index fell 0.4 percent, while futures of the Standard & Poor’s 500 Index were 0.4 percent lower. The S&P GSCI Spot Index of raw materials dropped 1.2 percent.

The U.S. currency also rallied as strategists speculated that the Federal Reserve won’t signal a third round of quantitative easing after a meeting on June 22. The Federal Open Market Committee has kept its benchmark rate unchanged between zero and 0.25 percent since December 2008. Investors forecast a 15 percent chance the central bank will increase the rate at its January meeting, according to CME Group Inc. data, down from 21 percent a month ago.

QE2 End

“Our economists expect the FOMC to make the formal decision to conclude QE2 at the end of June,” Barclays Plc strategists including London-based Sara Yates wrote today in a research note to clients.

Fed Chairman Ben S. Bernanke will likely reiterate that the balance of risk doesn’t favor further asset purchases, according to the strategists.

“In the current environment, we expect these comments to be mildly U.S. dollar positive,” the Barclays analysts wrote.

The dollar has appreciated 1.3 percent in the past week, according to Bloomberg Correlation-Weighted Currency Indexes.

--With assistance from James G. Neuger, Stephanie Bodoni in Luxembourg and Candice Zachariahs in Sydney. Editors: Paul Cox, Greg Storey

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

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


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