Bloomberg News

Euro Slumps in 3rd Quarter as Crisis, Slow Economy Damp Demand

October 01, 2011

Oct. 1 (Bloomberg) -- The euro had its worst quarter against the dollar and the yen in more than a year as concern increased European leaders won’t be able to contain the region’s debt crisis and Greece may default on its debt.

The 17-nation currency slumped against the dollar even as Standard & Poor’s cut its U.S. debt rating and as the Federal Reserve set further economic stimulus. The yen rose against all of its 16 major counterparts as the global economy slowed and investors sought refuge. The Swiss franc pared a gain against the euro after the nation’s central bank imposed a currency ceiling. One in four economists surveyed by Bloomberg forecast the European Central Bank will cut interest rates in five days.

“The twin stories driving the markets are still the European debt crisis and fears of a global economic downturn,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “All signs are still that the markets are very cautious and risk-averse and that’s helping the dollar and other safe-haven currencies.”

The euro dropped 7.7 percent to $1.3387, from $1.4502 on June 30. The shared currency weakened 11.7 percent to 103.12 yen, from 116.84, and touched 101.94 on Sept. 26, the weakest level since June 2001. The dollar dropped 4.3 percent to 77.06 yen, from 80.56 last quarter.

Euro Pact

An agreement in July by euro area leaders to expand the role of the European Financial Stability Facility and provide a second bailout for Greece failed to allay investor concern that the region’s crisis would spread.

The European Commission this week opposed ideas being floated by some government officials to get banks to accept bigger so-called haircuts on Greek debt holdings and doesn’t want to have talks about any such attempt, an official said this week on condition of anonymity because the deliberations are private.

The ECB was forced to start buying the bonds of Italy and Spain in August in an effort to stabilize the nations’ borrowing costs. The central bank is also lending dollars to euro-area banks, in coordination with the Fed and other central banks, to curb liquidity concern.

The dollar rallied against all the major currencies except for the yen. Demand for the U.S. currency increased after S&P cut its rating on U.S. debt to AA+ from AAA Aug. 5, causing stock markets to gyrate and investors to flock to the safety of Treasuries.

Twist Away

The Fed announced in Sept. 21 it will increase holdings of longer-maturity Treasuries, in a move known as Operation Twist, to limit borrowing costs and boost economic growth and jobs creation.

Yields on U.S. benchmark 10-year notes reached a record low of 1.6714 percent on Sept. 23.

Demand for haven assets pushed the yen to a post-World War II record of 75.95 against the dollar Aug. 19, even after Japan intervened in the currency markets in August for the third time in the past 12 months.

The franc dropped for a second month against the euro in September after the Swiss National Bank on Sept. 6 imposed a ceiling of 1.20 versus the euro and resumed purchases of foreign currencies to protect exports as the European debt crisis drove investors toward the relative safety of the Swiss currency. The franc had rallied 13 percent against the single currency this year before the ceiling was announced.

Franc Moves

The franc rose 0.3 percent to 1.2157 per euro in the third quarter and weakened 2.6 percent in September. It dropped 8.1 percent to 90.82 centimes per dollar.

Growth-linked currencies slumped in the third quarter as the global economy slowed. The Brazilian real, South African rand and Mexican peso each weakened more than 15 percent against the dollar since June.

The International Monetary Fund said Sept. 20 that the world’s largest economy will expand 1.5 percent this year, down from the 2.5 percent projected in June and lowered its forecast for 2012, citing unresolved debt-reduction and waning confidence among consumers and businesses.

“There’s been concerns about global growth and then you’ve got the euro zone’s long-running debt crisis,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network. “Any type of concern for the outlook of the global economy tends to lead investors to higher ground in the dollar and Japanese yen.”

Brazil Rates

The real dropped as the nation’s central bank unexpectedly cut its benchmark interest rate on Aug. 31 to 12 percent from 12.5 percent, citing a “substantial deterioration” in the global economy. The Brazilian government also imposed a tax on some investments in foreign-exchange derivatives in a bid to stem the currency’s rally. The real rallied 20 percent in the two years through July.

The Brazilian currency fell 20.2 percent to 1.8794 per dollar, from 1.5633 in the second quarter. South Africa’s rand lost 19.6 percent to 8.0967 per dollar, from 6.7693, and Mexico’s peso fell 18.6 percent versus the greenback to 13.8973.

New Zealand’s dollar dropped the most in the past three months since the last quarter of 2008, when the financial crisis roiled global markets. S&P and Fitch Ratings downgraded the nation’s credit rating this week, both citing concern that the government and household debt is expanding.

The kiwi, as the currency is known, weakened 8.2 percent to 76.14 cents per U.S. dollar, from 82.92 in the second quarter.

The ECB may cut its benchmark interest rate by at least a quarter-percentage point from the current rate of 1.5 percent at its Oct. 6 policy meeting, according to eight of 32 economists surveyed by Bloomberg News. The others expect no change.

The central bank has increased its lending rate by 0.5 percentage points twice this year in an effort to curb inflation. The meeting next week will be the last for President Jean-Claude Trichet. Bank of Italy Governor Mario Draghi will succeed him.

“The European economy has slowed, but it’s not enough to justify another easing,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “A steady hand from the ECB will probably help the euro a little bit next week, but it’ll only be a temporary respite from a lively, very sharp fall.”

--Editors: Paul Cox, Dave Liedtka

To contact the reporters 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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