Bloomberg News

Euro Slips From Two-Week High Versus Dollar on Bailout Concern

July 22, 2011

July 22 (Bloomberg) -- The euro dropped for the first time in four days against the dollar on concern measures announced by European Union officials yesterday to contain Greece’s debt crisis won’t be enough to quell regional turmoil.

The dollar rose from a four-month low against the yen on speculation the U.S. is approaching a deal to raise its debt ceiling. Norway’s krone fell versus the dollar after a deadly bomb blast in Oslo. The 17-nation euro pared its weekly gain as Fitch Ratings said Greece faces “restricted default” after euro-area leaders agreed on a new bailout for the nation that would involve contributions from bondholders.

“Right now you have a bit of relief that they were able to come up with a viable plan, but it doesn’t address some of the longer-term structural issues,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “The euro came down a little bit, had a reaction to yesterday’s run-up.”

The euro fell 0.5 percent to $1.4360 at 5 p.m. in New York, from $1.4425 yesterday, after reaching $1.4439, the highest level since July 6. The shared currency still gained 1.4 percent this week. The dollar climbed 0.3 percent to 78.54 yen after touching 78.22, the lowest level since the day before the Group of Seven intervened to weaken Japan’s currency following the March 11 earthquake and tsunami.

Oslo Blast

Norway’s krone dropped after the bomb blast in Oslo killed seven people and shattered windows at the office of Prime Minister Jens Stoltenberg, who was reported safe. The blast was followed by a shooting at a Labor Party youth gathering that left four dead, the Varden newspaper reported. The krone slid 0.3 percent to 5.4144 versus the dollar.

The Canadian dollar fell from almost a three-year high after a government report showed the nation’s inflation rate slowed last month more than economists forecast. The loonie depreciated 0.5 percent to 94.80 U.S. cents after reaching 94.23 yesterday, the strongest level since November 2007.

Consumer prices advanced 3.1 percent in June from a year earlier after a 3.7 percent gain in the previous month, Statistics Canada said. The median forecast of 24 economists in a Bloomberg News survey was for a 3.6 percent rate of increase.

The dollar rose against the yen following reports the White House is cutting a deal with House Republicans to boost the U.S. debt ceiling and reduce deficits by about $3 trillion over 10 years without immediate revenue increases. President Barack Obama’s team has told congressional leaders it’s pursuing such a deal, according to two officials familiar with the talks.

U.S. Deficit Focus

“What we know now is that we’ve gotten what we’re going to get from Europe, and the NFL owners have just come to an agreement of a 10-year deal,” said Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc in Stamford, Connecticut. “The question is can Congress do the same. What’s in the market is that the debt ceiling will be rising and there is uncertainty of the magnitude of a deficit reduction.”

Europe’s shared currency was little changed at 1.1762 Swiss francs, after falling as much as 0.5 percent, and slid 0.2 percent to 112.77 yen on revised demand for a refuge following the European debt agreement.

Greece would be cut to “RD,” or “restricted default,” if the plan is implemented, Fitch said today in an e-mailed statement. The ratings company lowered Greece by three levels to “CCC” on July 13.

“The proposed debt exchange implies a 20 percent net present value loss for banks and other holders of Greek government debt,” the statement said. “An exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress constitutes a default event under Fitch’s ‘coercive debt-exchange criteria.’”

Greece Aid

Euro-area leaders announced yesterday after eight hours of talks in Brussels 159 billion euro ($229 billion) in new aid for Greece, with bondholders agreeing to contribute to the package. They also expanded the role of the 440-billion euro rescue fund to buy debt across distressed nations, assist troubled banks and offer credit lines.

“It represents a positive step forward in easing fiscal adjustment for the periphery, but crucially fails to significantly reduce solvency concerns,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a research note to clients. “A continuation of solvency concerns will leave the door open for contagion fears to rebuild.”

A gauge of Asian currencies touched a 14-year high as the pledge of more assistance for Greece supported demand for emerging-market assets. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-traded currencies excluding the yen, reached the highest level since August 1997.

South Korea’s won touched 1,050.05 per dollar, the strongest level since August 2008, before trading at 1,051.98. China’s yuan rose to a 17-year high.

Greek two-year notes rallied, pushing the yield down as much as 8.15 percentage points to 25.66 percent in the biggest decrease on a closing basis since May 2010.

--With assistance from Paul Dobson in London. 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: Dave Liedtka at dliedtka@bloomberg.net


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