Bloomberg News

Euro Weakens on Prospects for Greece; Dollar Falls Before Fed

June 22, 2011

June 22 (Bloomberg) -- The euro fell against the majority of its most-traded peers amid speculation Greek Prime Minister George Papandreou will struggle to pass additional austerity measures, even after winning a confidence vote yesterday.

The dollar fell versus most counterparts, including the Swiss franc, before the Federal Reserve issues a statement after a two-day meeting and Chairman Ben S. Bernanke gives a press conference. The pound weakened for the first time in four days against the greenback as minutes of the last Bank of England meeting showed some officials saw a risk more bond purchases may be required.

“It was a given that he would pass the vote, and what’s not a given is how to pass the austerity measures,” Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York, said of Papandreou. “There could be doubts on the austerity measures, and that would have an adverse effect on the euro. As soon as the Greek vote was over, the focus shifted to the Fed meeting today.”

Europe’s shared currency rose 0.2 percent to $1.4435 at 10:39 a.m. in New York, after earlier rising to $1.4442, the strongest level since June 15. The euro was little changed against its Japanese counterpart at 115.55 yen. The dollar declined 0.2 percent to 80.03 yen, from 80.21.

The franc strengthened 0.7 percent to 83.45 centimes per dollar, from 84.05 centimes yesterday.

The euro has dropped 1 percent over the past three months versus nine other developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The franc has climbed 5.9 percent as investors sought a haven from Europe’s sovereign-debt crisis.

Austerity Package

Papandreou will seek approval next week for a 78 billion- euro ($112 billion) package of budget cuts and asset sales to help ensure more financial aid from the European Union and the International Monetary Fund and stave off the threat of default.

The IMF, contributor of a third of the bailout money for Greece and the two other euro-area countries that have received bailouts, Ireland and Portugal, has warned EU leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.”

“What happened yesterday has bought the Papandreou government a couple of weeks to push through budget cuts and austerity measures,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The scenario is negative; there’s no positive. The euro is weaker than where it was before the vote and is likely to head lower.”

Fed Statement

The Fed is scheduled to release a statement at 12:30 p.m., followed by Bernanke’s press conference at 2:15 p.m. The Federal Open Market Committee will keep the benchmark interest rate at zero to 0.25 percent, where it’s been since December 2008, according to economists surveyed by Bloomberg News.

The committee will “firm up” language about keeping borrowing costs low for an extended period and apply that to its balance sheet as well, BNP Paribas SA analysts led by New York- based Ray Attrill wrote in a note to clients.

The Fed’s second round of quantitative easing, a program to purchase $600 billion in Treasuries, is scheduled to end this month. Futures show the likelihood policy makers will increase the target rate by March 2012 dropped to 20 percent, from 30 percent a month ago.

“I don’t think the FOMC decision will support the dollar,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “While they will signal the end of the current quantitative easing scheduled at the end of June, that’s fully anticipated.”

Pound Weakens

The pound slid 0.7 percent to $1.6140 and was 0.8 percent weaker at 89.45 pence per euro.

The majority of the Monetary Policy Committee said the “current weakness of demand growth was likely to persist for longer than previously thought,” according to minutes of the June 8-9 Bank of England meeting published today in London. Europe’s debt crisis highlighted the potential for further shocks, and for some members, it “was possible that further asset purchases might become warranted,” the notes showed.

Norway’s krone extended an advance versus the euro as the Norges Bank kept its benchmark interest rate on hold at 2.25 percent and said gradual increases are projected for the second half of the year.

The krone gained 0.8 percent to 7.8453 per euro and appreciated 1 percent against the dollar to 5.4327.

Greek Contagion

The euro may fall in the second half of the year to levels last seen in February on risks that contagion from Greece will affect countries including Ireland and Portugal, Aberdeen Asset Management Plc said.

“The European situation is not just about Greece,” said Anthony Michael, the Singapore-based head of Asia-Pacific fixed income at Aberdeen Asset, which manages $103 billion of investments in the region. “It’s also about Ireland, Portugal and Spain, and the risk of contagion out of Greece and across the banking industry throughout Europe.”

The 17-nation currency may drop to as low as $1.35 in the second half of the year, which would be the weakest since Feb. 16, the firm said. The median forecast of economists in a Bloomberg survey is for it to trade at $1.41 by year-end.

--With assistance from Candice Zachariahs in Sydney. Editors: Greg Storey, Dennis Fitzgerald

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

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


Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus