Bloomberg News

Euro Drops to One-Week Low Versus Dollar on European Debt Crisis

July 06, 2011

July 6 (Bloomberg) -- The euro declined to a one-week low against the dollar a day after Portugal became the second nation in the currency region after Greece to receive a junk credit rating from Moody’s Investors Service.

The New Zealand dollar gained versus the greenback after the Pacific Tsunami Warning Center canceled a tsunami warning for the South Pacific nation after an earthquake. The Swiss franc, yen and dollar rose against most of their major counterparts as Europe’s sovereign-debt crisis and China’s decision to increase interest rates spurred demand for a refuge.

“The markets did not digest the downgrade of Portugal to junk status all too well,” said Jessica Hoversen, an analyst at the futures broker MF Global Holdings Ltd. in New York. “Now you have two major European economies regarded as junk by Moody’s. There are contagion fears.”

The euro dropped 0.8 percent to $1.4319 at 5 p.m. in New York, from $1.4429 yesterday, after touching $1.4286, the lowest level since June 28. The euro slid 1 percent to 115.86 yen, from 116.97, after sliding as low as 115.55. The U.S. currency fell 0.2 percent to 80.91 yen, from 81.07.

The New Zealand dollar erased gains earlier today after the U.S. Geological Survey reported a magnitude 7.8 earthquake 132 miles off the Kermadec Islands region and a tsunami warning went into effect for the islands, Tonga and New Zealand.

The currency rose 0.2 percent to 82.70 U.S. cents after falling as much as 0.2 percent. The Australian dollar was little changed at $1.0701.

Stronger Franc

The Swiss franc appreciated 0.9 percent to 1.2021 against the euro and advanced 0.2 percent to 83.92 centimes versus the dollar. The currency benefits from Switzerland’s role as a stable, neutral financial center.

Sweden’s krona declined 1 percent to 6.3555 versus the dollar, Norway’s krone slid 0.8 percent to 5.4156 and Canada’s currency depreciated 0.2 percent to 96.53 cents.

The Thomson Reuters/Jefferies CRB Index of raw materials decreased 0.4 percent. Crude oil for August delivery dropped as much as 1 percent before trading at $96.99 a barrel in New York. The Standard & Poor’s 500 Index rose 0.1 percent.

The krona may rally toward its strongest level since 1992 as appetite for higher-yielding assets revives, according to MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America Corp. in New York.

‘Very Supportive’

“The resumption of risk assets in general is going to be very supportive of the Swedish krona,” Curry said in a telephone interview. “The corrective bounce into the June highs has run its course and a larger downtrend is resuming,” said Curry, referring to the dollar versus the krona.

The Swedish currency climbed in April 2008 to 5.8218 versus the dollar, the strongest in 15 years, according to Bloomberg data. The krona may appreciate to 5.8210, according to Curry.

The dollar remained lower against the yen today after the Institute for Supply Management in Tempe, Arizona, reported that its non-manufacturing Index dropped to 53.3 last month from 54.6 in May. The median forecast of 71 economists in a Bloomberg News survey was for a reduction to 53.7. Readings greater than 50 signal expansion.

The Philippine peso climbed to its strongest level since May 3 after Fitch Ratings forecast the nation’s economy would expand as much as 6 percent this year and next. The peso appreciated 0.4 percent to 42.900 per dollar after touching a two-month high of 42.825, according to Tullett Prebon Plc.

Moody’s on Portugal

The euro fell after Moody’s lowered Portugal’s long-term government bond ratings yesterday to Ba2 from Baa1. 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 in a statement.

Greece received the lowest sovereign credit rating in the world from S&P on June 13, when the company lowered it to CCC, eight levels below investment grade. S&P rates Portugal at BBB-, the lowest investment grade.

The Portuguese 10-year government bond yield jumped today to a record 12.55 percent, while Irish, Italian, Spanish and Greek yields also surged on bets more ratings cuts may follow.

“The European situation is really weighing on sentiment,” said Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York. “It’s not only Portugal, but it’s Italy and Spain. We had a pretty big rally at the end of last week, so we’re giving back some of those gains now,” Nordvig said, referring to the euro.

ECB Outlook

The European Central Bank will increase its main refinancing rate to 1.50 percent tomorrow from 1.25 percent, according to all 55 economists in a Bloomberg News survey. Swaps traders are betting the ECB will raise its target rate by 76 basis points over the next 12 months.

China is raising benchmark interest rates for the third time this year after inflation accelerated to the fastest pace since July 2008. The one-year deposit rate will rise to 3.5 percent, the People’s Bank of China said on its website today. The move may fuel concern that monetary tightening will trigger a slowdown in the world’s second-biggest economy.

--With assistance from Lucy Meakin in London and Karl Lester M. Yap in Manila. Editors: Dennis Fitzgerald, Greg Storey

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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