Bloomberg News

Euro at Almost Decade Low Versus Yen on Greece, Italy Debt Woes

September 13, 2011

Sept. 13 (Bloomberg) -- The euro fell toward its weakest level in a decade against the yen on speculation Greece is nearing default and as Italy’s borrowing costs rose at a sale of 3.9 billion euros ($5.3 billion) of bonds.

The 17-nation currency fluctuated against the dollar after a statement by a spokesman for French President Nicolas Sarkozy that he and German Chancellor Angela Merkel won’t announce joint initiatives on the region’s debt crisis today. The yen rose against all of its 16 major counterparts except for South Africa’s rand as increased concern in the euro area spurred safety demand. The rand rose as commodity prices rallied.

“The main driver of market stress is euro-zone problems,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “There’s a lot of rumors. Markets are riddled with uncertainty and it’s making for very high volatility.”

The euro weakened 0.4 percent to 105.19 yen at 11:37 a.m. in New York, after sliding to 103.90 yesterday, the lowest since June 2001. The shared currency was little changed at $1.3675. The yen rose 0.4 percent to 76.93 per dollar.

French Statement

A spokesman for Sarkozy, Franck Louvrier, rejected a report by Reuters that he and Merkel would announce today joint initiatives on Greece to stem the debt crisis. Sarkozy may make a statement after he meets today with European Union President Herman Van Rompuy, Louvrier said.

“It’s a market reaction to the news as it develops out of Europe,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “That’s the kind of noise that hits the market and creates the kind of volatility that we see.”

JPMorgan Chase & Co.’s Group of Seven Volatility Index, which reflects investor expectations of currency swings in the future, jumped to 14.4 yesterday, the highest level since Aug. 11, and traded at as much as 14.11 today,

The rand snapped three days of declines after the reports that China may invest in Italy eased investor concern and boosted appetite for the currency.

Rand Moves

“We’re having a positive global macro backdrop and some technical conditions that favored a correction in the rand’s weakness,” Michael Roche, an emerging-market strategist at MF Global in New York.

The rand advanced 0.9 percent to 7.3442 per dollar.

The Thomson Reuters/Jefferies CRB Index of raw materials rose 0.2 percent and crude oil added 1 percent to $89.09 a barrel in New York.

Italy’s Treasury sold five-year bonds at an average yield of 5.6 percent, compared with 4.93 percent on July 14, the last time securities of a similar maturity were sold. Demand was 1.28 times the amount on offer, compared with a bid-to-cover ratio of 1.93 at the previous sale. The Treasury had aimed to sell a maximum of 4 billion euros.

The euro was boosted yesterday after an Italian government official said talks had been held with Chinese counterparts about potential investments in Europe’s third-largest economy. The purchase of Italian bonds was not the focus of the meetings, which took place in the past few weeks, the official said on condition of anonymity, without specifying which assets may be involved.

Italy’s Debt

“The story itself provided some interest, but I don’t think necessarily it turns the tide,” said Jeremy Stretch, executive director of foreign-exchange strategy in London at Canadian Imperial Bank of Commerce. “The problem for Italy is the size of the stock of debt. It’s a pretty big hole and even the Chinese would struggle to fill that one up on an ongoing basis.”

The cost of insuring against default on European sovereign and bank debt rose to records on mounting concern a default by Greece will trigger losses for banks holding the nation’s bonds, according to CMA. Credit-default swaps signal a 98 percent probability of default.

Merkel said in an interview with the Berlin-based broadcaster Inforadio she won’t let Greece fall into “uncontrolled insolvency” because the risk of contagion for the other euro-zone countries “is very big.” The so-called troika of the International Monetary Fund, European Central Bank and European Commission representatives will return to Greece this week, Merkel said.

Euro Strength

The euro has dropped 4.2 percent against the dollar this month and touched $1.3495 yesterday, the lowest level since February. The currency’s 14-day relative strength index against the dollar fell to 29.5, less than 30, signaling it may have declined too fast and may reverse.

The yen strengthened as risk aversion prompted investors to buy the currency as a refuge. It has appreciated 2.9 percent in the past week, the best performer among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes.

The yen tends to appreciate during economic and financial turmoil because Japan’s current-account surplus makes the nation less reliant on foreign capital.

The Norwegian currency weakened against all but one of 16 major peers tracked by Bloomberg on bets its central bank may cut interest rates. The recent strengthening of the krone has increased the probability of lower borrowing costs, Dagens Naeringsliv reported last week, citing DnB NOR ASA’s Chief Executive Officer Rune Bjerke.

A Credit Suisse index shows traders predict the Norges Bank will cut its benchmark rate by 71 basis points during the next year, compared with expectations of a 44-point increase at the start of last month.

Norway’s krone slid to a two-week low of 7.7689 against the euro, later weakening 0.5 percent to 7.7245. It slipped 0.5 percent to 5.6482 per dollar.

--With assistance by Kristine Aquino in Singapore. Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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


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