Bloomberg News

Euro Drops on Debt Crisis Concern Before Central Bank Meeting

October 05, 2011

Oct. 5 (Bloomberg) -- The euro fell against most of its major counterparts as concern the region’s debt crisis may spread led investors to shun the currency before a European Central Bank meeting tomorrow.

The 17-nation euro weakened to almost a decade low against the yen as speculation increased the ECB may introduce measures to shore up the region’s economy. The pound declined against the dollar and euro after a report showed U.K. economic growth slowed during the second quarter. The dollar rose briefly against the yen after a report showed U.S. service industries expanded last month at a slower pace.

“It’s being priced into the market that a rate cut could be forthcoming,” said Greg Salvaggio, senior vice president of capital markets in Washington at the currency-trading firm Tempus Consulting Inc.

The euro depreciated 0.2 percent to 102.35 yen at 1:29 p.m. in New York, after dropping to 100.76 yen yesterday, the weakest level since June 2001. The currency declined 0.2 percent to $1.3326, after falling as much as 0.7 percent. The dollar was little changed at 76.83 yen.

Economic Move

The euro briefly pared its losses and the dollar strengthened against the yen after a report showed U.S. service industries expanded in September by more than forecast. The Institute for Supply Management’s non-manufacturing index fell to 53 from 53.3 in August, higher than the 52.8 forecast in a Bloomberg News survey.

“The ISM numbers are consistent with slow growth and not a recession in the U.S. and I think that’s the view that the market has been shifting to,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Some of the fears of renewed recession have eased over the past couple of weeks.”

The U.K. economy expanded 0.1 percent from the first quarter, lower than the 0.2 percent previously published, the Office for National Statistics said today in London. Consumer spending plunged 0.8 percent, the most since the first quarter of 2009. The slow growth is adding pressure on the central bank to keep interest rates low. The Bank of England meets tomorrow.

The pound dropped 0.4 percent to $1.5429.

Export Gains

Currencies of commodity-exporting countries rose as the Standard & Poor’s Index advanced 0.7 percent, increasing demand for assets linked to growth.

Brazil’s real increased 1.4 percent to 1.8319 per dollar for the best performance against the greenback among the major currencies.

Turkey’s and Russia’s central banks separately intervened in the currency market in an effort to prop up their currencies.

Turkey’s central bank sold $750 million of liras in a daily auction, its biggest such sale on record. The lira rose 0.7 percent to 1.8742 per dollar, after falling to a record low of 1.9096 yesterday.

Bank Rossii sold about $8 billion to shore up the ruble last month, the most since it arrested the currency’s devaluation in January 2009, Chairman Sergey Ignatiev said. The central bank intensified sales yesterday, selling $1.15 billion in the currency market, after the ruble plunged to the weakest level against the dollar in more than two years yesterday.

The ruble rose 0.5 percent to 32.5538 per dollar after touching 32.8935 yesterday, the weakest since August 2009.

Franc Falls

The Swiss franc dropped the most among the major currencies, falling 0.7 percent to 92.31 centimes per dollar and weakening 0.6 percent to 1.2301 per euro. The Swiss National Bank last month imposed a ceiling of 1.20 versus the euro to curb the franc’s appreciation.

The Swedish krona weakened 0.6 percent to 6.8810 per dollar.

Traders increased bets the ECB will lower borrowing costs tomorrow to fuel growth as the region’s debt crisis rattles markets. Eleven of 52 economists surveyed by Bloomberg predicted the central bank will cut its benchmark rate by at least a quarter-percentage point from the current rate of 1.5 percent. The others expect no change.

Moody’s Investors Service cut Italy’s rating three levels to A2 from Aa2, citing concern the government will struggle to reduce the region’s second-largest debt amid weak growth. Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years.

Euro Moves

The euro erased earlier declines as European stocks rose amid speculation policy makers are looking at measures to shield banks from the region’s sovereign-debt crisis.

The Financial Times quoted European Union Economic and Monetary Commissioner Olli Rehn as saying there’s an “increasingly shared view” the region needs a coordinated approach to halt the debt crisis. He said today that there’s no concrete plan to recapitalize banks. Speculation about the effect of euro area bank holdings of Greek debt has helped weaken the euro 5.5 percent in the past month.

“We just need to know that there’s a bold policy response that European policy makers are willing to take to avert a meltdown,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “The euro has been whacked so much lately that any accommodative policy from the ECB is likely to bring down the risk premium and that might support the euro.”

The euro is down 3.6 percent during the past year among the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen is up 9.9 percent and the dollar has added 0.7 percent.

--With assistance from Kristine Aquino in Singapore. Editors: Paul Cox, Dave Liedtka

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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