Bloomberg News

Euro Falls Third Day After S&P Cut Italy’s Rating; Dollar Gains

September 20, 2011

Sept. 20 (Bloomberg) -- The euro declined against the dollar for a third day after Standard & Poor’s cut Italy’s credit rating, adding to concern Europe’s debt crisis will raise borrowing costs for the region’s largest economies.

The 17-nation shared currency approached its lowest since 2001 versus the yen before Greece resumes discussions with creditors aimed at staving off default. The dollar gained versus all but two of 16 major peers before the Federal Reserve’s policy meeting today. South Korea’s won fell to its weakest this year as Asian stocks slumped.

“Investors are still pricing in the possibility of a Greek default and that’s weighing on the euro, particularly against the dollar and yen which seem to be benefiting in this environment,” said Chris Walker, a foreign-exchange strategist at UBS AG in London. “The crisis in Europe is going to get worse before it gets better so we would recommend selling the euro at these levels. We think it’ll go to $1.30 by year-end.”

The euro slid 0.1 percent to $1.3670 as of 8:58 a.m. in London from $1.3686 in New York yesterday. It declined to 104.1862 yen from 104.82 yesterday and touched 103.90 on Sept. 12, the least since June 2001. The dollar bought 76.52 yen from 76.58.

Asian stocks extended a two-week decline, with the region’s benchmark index falling 0.8 percent. The Stoxx Europe 600 Index gained 0.7 percent.

‘Weakening’ Prospects

The rating for Italy, which has Europe’s second-largest debt load, was lowered to A from A+, S&P said yesterday in a statement. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit ratings cut this year. The European Central Bank last month started buying Italian and Spanish government bonds after the region’s debt crisis pushed their yields to euro-era records.

Greek Prime Minister George Papandreou’s government will hold another call with European Union and International Monetary Fund officials tonight in a bid to secure a sixth installment of rescue funds, amid concern the austerity measures demanded are deepening a three-year recession and making it harder for the government to meet its deficit goals.

Finance Minister Evangelos Venizelos held “substantive” discussions with the officials, the finance ministry said in an e-mailed statement after a teleconference last night.

‘Selling Into Rallies’

“I’d be selling into rallies in the euro,” said Richard Grace, the Sydney-based chief foreign-exchange strategist and head of international economics at Commonwealth Bank of Australia. “The conditions of receiving the payment are that Greece implements austerity measures and it looks like they’re having difficulty doing that. The implication is the next tranche is withheld.”

Papandreou is considering holding a referendum on whether his nation should remain in the common currency, the Kathimerini newspaper said, citing people it didn’t name. Greek government spokesman Ilias Mosialos denied the report.

The dollar advanced before Fed officials begin a two-day meeting. Policy makers may decide to replace some of the short- term Treasuries in the Fed’s $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists at Wells Fargo & Co., Barclays Plc and Goldman Sachs Group Inc.

‘More Aggressive’

The Fed may go further by reducing the interest rate paid on reserves, according to Adrian Foster, head of financial- market research for Asia at Rabobank Groep NV in Hong Kong.

“Everyone is worried about all the risks, so this time around when we see a central bank actually taking more aggressive action than the average market expectation, you may get a bit of a boost to the dollar,” Foster said.

The yen strengthened against all but one of its 16 major peers. Japan’s trade minister Yukio Edano said the country will deal with any speculative currency moves.

Australia’s dollar rose as the nation’s central bank said it was well positioned to respond to global and domestic risks or the threat of an acceleration of inflation, according to minutes of a Sept. 6 meeting at which policy makers kept its cash target unchanged at 4.75 percent.

Lows for Year

The so-called Aussie traded 0.3 percent stronger at $1.0248. It earlier fell as low as $1.0149, its weakest since Aug. 11. It gained 0.1 percent to 78.39 yen.

South Korea’s won and Malaysia’s ringgit reached 2011 lows as the European debt crisis damped demand for higher-yield currencies.

“Risk aversion has gone to the next level and the losses are justified, given that European officials have not been able to reassure the markets on the default risk,” said Suresh Kumar Ramanathan, a strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “Asian assets are getting sold off in favor of cash.”

The won dropped 1 percent to 1,1148.90 per dollar after earlier touching 1,156.50, the weakest since Dec. 22, according to data compiled by Bloomberg. Malaysia’s ringgit retreated 0.4 percent to 3.1267 per dollar. It earlier reached 3.1412, the weakest since Dec. 21.

--With assistance from Yumi Teso in Bangkok and Candice Zachariahs in Sydney. Editors: Matthew Brown, Nicholas Reynolds

%AUD %USD %MYR %KRW %JPY %EUR

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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