Bloomberg News

Euro Falls to June 2001 Low Versus Yen on Greece Default Concern

September 12, 2011

Sept. 12 (Bloomberg) -- The euro fell, touching its lowest level since 2001 against the yen, as speculation German Chancellor Angela Merkel is preparing for a Greek default curbed demand for the 17-nation currency.

The euro erased losses against the dollar after the Financial Times reported that Italy was in talks with a Chinese investment firm that may buy its bonds. The euro declined earlier to the lowest level versus the greenback since February after Greece’s chance of default in the next five years soared to 98 percent. The yen advanced against all its most-traded counterparts as demand for refuge increased and as the Swiss National Bank-imposed ceiling on the franc leaves Japan’s currency as one of the few haven assets.

“With the market in the very fractious state that it’s in, it provides the pretense for a little bit of euro short covering,” said Ray Attrill, a senior currency strategist in New York at BNP Paribas SA. “The dollar is strong because it’s a very risk-averse market environment of which euro-zone specific concerns are a fairly key part of, although there’s also global growth worries.”

The euro dropped 0.4 percent to 105.62 yen at 5:01 p.m. in New York, from 105.99 on Sept. 9, after sliding to 103.90, the lowest level since June 2001. The euro traded at $1.3679 after decreasing to $1.3495, the weakest since Feb. 15. The yen gained 0.5 percent to 77.21 per dollar.

Market Swings

The Standard & Poor’s 500 Index rose 0.7 percent after falling as much as 1.6 percent. Crude oil futures rose 1.9 percent to $88.90 a barrel and the yield on the 10-year Treasury note touched a record low 1.8770 percent.

The 14-day relative strength index for the euro against the dollar fell to 28.52, less than 30 for a second day, signaling it may have declined too fast and may reverse.

One-month implied volatility on the currency pair reached 17.9 percent, the highest level since May 2010. The cost of options protecting on a drop in the euro also increased relative to options hedging an advance.

“We’ve come quite far quite fast,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “There’s a sense that the market got ahead of itself in terms of thinking this weekend might see an exit of Greece from the monetary union.”

Italian officials have held talks with Chinese counterparts about potential investments in the euro region’s third-largest economy, a government official said.

The purchase of Italian bonds by China was not the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity. A spokesman for Italian Finance Minister Giulio Tremonti declined to comment.

Less carry

Slowing global growth is punishing investors who bet on Australian and Brazilian assets using money borrowed in dollars and yen with the biggest losses in more than a year. A UBS index tracking the performance of carry trades in which investors sell currencies with low interest rates to buy ones in 24 markets with higher yields has tumbled 2.6 percent this month.

It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance Sept. 9, according to CMA.

Merkel’s government is debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three officials said Sept. 9. Merkel held talks on the debt crisis today with European Commission President Jose Manuel Barroso.

Progress Report

Germany will decide on a course of action after receiving the results of a Greek progress report, a government spokesman said, speaking on the customary condition of anonymity.

The Greek Cabinet voted yesterday to cut one month’s wages from all elected officials and impose an annual charge on all property for two years, Finance Minister Evangelos Venizelos told reporters. The nation has the cash reserves to cover its needs for October, Ta Nea newspaper reported, citing comments from Deputy Finance Minister Filippos Sachinidis.

Traders are betting that the ECB will cut rates by 37 basis points, or 0.37 percentage point, in the next 12 months, according to a Credit Suisse Group AG index. That compares to a 25-basis-point increase projected Aug. 1. ECB President Jean- Claude Trichet said last week after the central bank’s meeting that “downside risks” to the region’s economy have intensified.

French Banks

BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks by market value, led European equity declines after two people with knowledge of the matter said Moody’s Investors Service may cut their credit ratings as soon as this week because of their Greek holdings.

Japan’s yen was the best performer among the 10 developed nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes, rising 1.5 percent today. The yen tends to gain during economic and financial turmoil because Japan’s current account surplus makes it less reliant on foreign capital.

“One of the safe havens was taken away -- the Swiss franc -- and the yen is one of the remaining safe havens,” said Carl Forcheski, a director on the corporate currency sales desk in New York at Societe Generale. “Euro-yen is reflecting that euro-Swiss is taken out of the equation at the moment. I wouldn’t be surprised to see the yen strengthen a little bit more.”

The Swiss National Bank last week imposed a ceiling on the franc at 1.20 per euro, the first time such a limit was set since 1978, in an effort to curb the currency’s gains. The franc had rallied 13 percent against the single currency this year before the ceiling was announced.

Japanese Finance Minister Jun Azumi ended his first Group of Seven meeting without his counterparts objecting to his pledge to take “bold actions” to stem yen gains, paving the way for a fresh intervention if he deems it necessary.

--With assistance from Candice Zachariahs in Sydney. Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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


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