Bloomberg News

Euro Drops as Moody’s Cuts Portugal Debt to Junk; Dollar Rises

July 05, 2011

July 5 (Bloomberg) -- The euro fell for the first time in seven days against the dollar after Moody’s Investors Service cut Portugal’s government bond rating to junk and said banks rolling over Greek bonds may incur impairment charges.

The dollar advanced versus most of its major counterparts on speculation China’s efforts to tame inflation and Europe’s sovereign-debt crisis will damp demand for higher-yielding assets. The European Central Bank is forecast by economists to raise interest rates at its meeting this week, and a report may show the U.S. unemployment rate held at 9.1 percent.

“It’s just another reason to sell the euro,” John Doyle, a strategist in Washington at the currency-trading firm Tempus Consulting Inc., said of the Portugal downgrade. “It continues to drill down and reiterate the story that the euro debt crisis is still a huge problem.”

The euro fell 0.8 percent to $1.4429 at 5 p.m. in New York, from $1.4539 yesterday, when it touched $1.4578, the highest level since June 9. The euro dropped 0.4 percent to 116.97 yen, from 117.47. The greenback climbed 0.3 percent to 81.07 yen, from 80.80.

The 17-nation euro extended its drop after Moody’s cut Portugal’s long-term ratings to Ba2, two levels below investment grade. The reductions stem partly from “the growing risk that Portugal will require a second round of official financing before it can return to the private market,” Moody’s said today in a statement.

There is also “the increasing possibility that private sector creditor participation will be required as a pre- condition,” the ratings company said.

Moody’s on Rollover

Europe’s currency slid earlier after Moody’s said in a report dated yesterday that banks agreeing to roll their Greek government bonds into new securities may incur impairment charges on debt maturing through June 2014 that they still hold.

Standard & Poor’s said yesterday the bond-rollover plan would likely qualify as a distressed exchange and prompt a “selective default” grade on Greek securities.

Greece’s Prime Minister George Papandreou secured passage last week of 78 billion euros ($113 billion) of additional budget cuts and revenue measures needed to meet bailout targets.

Sweden’s krona appreciated 0.3 percent to 9.0744 versus the euro after the Scandinavian nation’s Riksbank raised the benchmark repurchase rate for the seventh time in a year, increasing it by a quarter-percentage point to 2 percent. The krona declined 0.5 percent to 6.2894 versus the dollar as the downgrade of Portugal spurred demand for a refuge.

Stronger Franc

The Swiss franc, a traditional haven from economic turmoil, rallied against all of its major counterparts, appreciating 0.9 percent to 84.05 centimes versus the dollar and climbing 1.6 percent to 1.2130 against the euro.

China is likely to raise rates to combat consumer-price increases that may have reached 6.2 percent in June, said the Economic Information Daily, citing market estimates. That followed comments by the People’s Bank of China yesterday that the country still faces “large” inflationary pressure.

The Australian dollar weakened against the greenback after the South Pacific nation’s central bank left borrowing costs unchanged. The Reserve Bank of Australia kept its cash rate target at 4.75 percent for a seventh straight meeting as signs of slower growth from Europe to China dimmed prospects for an acceleration in hiring at home.

‘Pressure’ on Aussie

“You’d expect local bond yields to adjust a little lower, and therefore interest-rate spreads will compress and put some mild damping pressure on the Australian dollar,” said Richard Grace, chief currency strategist in Sydney and international economics head at Commonwealth Bank of Australia.

Australia’s currency fell 0.4 percent to $1.0693 after touching $1.0790 on July 1, the highest level since May 11. The Aussie was little changed at 86.69 yen.

The yen dropped versus the dollar after Japan’s Finance Minister Yoshihiko Noda said the government may run out of money as early as October unless a bill authorizing bond sales is passed in parliament.

IntercontinentalExchange Inc’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, rose 0.5 percent to 74.649. The gauge slid yesterday to 74.111, the lowest level since June 10.

U.S. employers added 100,000 jobs in June after an increase of 54,000 in the previous month, according to the median forecast of economists in a Bloomberg News survey before the Labor Department’s July 8 report.

A day before that, the ECB will probably increase its main refinancing rate to 1.50 percent from 1.25 percent, according to all 55 economists in a Bloomberg News survey.

ECB President Jean-Claude Trichet reiterated last week that policy makers are in a state of “strong vigilance,” a phrase he has used before tightening monetary policy.

“The rate hike is pretty much a done deal in the market,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York.

--Editors: Dennis Fitzgerald, Greg Storey

To contact the reporter on this story: Catarina Saraiva in New York at

To contact the editor responsible for this story: Robert Burgess at

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