Bloomberg News

Euro Drops Versus Yen for 6th Week as Debt Crisis Damps Demand

October 08, 2011

Oct. 8 (Bloomberg) -- The euro weakened against the yen for a sixth straight week, matching a string of losses ended in June 2010, after Italy and Spain saw their ratings cut even after the European Central Bank said it would aid regional banks.

The 17-nation currency slid against most of its major counterparts amid increased speculation Greece may have to default, deepening the region’s debt crisis. Higher-yielding currencies, such as the Brazilian real and Mexican peso, rose as stocks advanced and after a report showed employment in the world’s biggest economy rose more than forecast. Group of 20 finance ministers meet in Paris Oct. 14-15 before a G-20 summit in Cannes in November.

“The U.S. dollar has some legs to gain against the euro going into the end of the year,” said John Doyle, a strategist in Washington at currency-trading firm Tempus Consulting Inc. “It’s not a matter of if, it’s a matter of when Greece is going to default, and that’s going to weigh on the common currency.”

The euro dropped 0.5 percent to 102.66 yen this week and reached 100.76 yen Oct. 4, the weakest level since June 2001. The common currency fell 0.1 percent to $1.3378. The dollar fell 0.4 percent to 76.73 yen.

Ratings Cuts

Italy’s rating was cut to A+ from AA- by Fitch Ratings yesterday and to A2 from Aa2 by Moody’s Investors Service earlier this week. Both companies cited concern stemming from the euro region’s debt crisis. Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years.

Spain’s rating was also reduced yesterday by Fitch, to AA- from AA+. The outlook for Spain and Italy is negative. The ratings company maintained a rating watch negative on Portugal, indicating the nation may still be cut to below investment grade.

“It’s a reminder for people that there’s still a nice laundry list of issues that they have to get through,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc.

ECB President Jean-Claude Trichet said the region’s economy is facing “intensified downside risks.”

The euro gained Oct. 6 after Trichet, announcing a policy decision for the final time, said the ECB will resume covered- bond purchases and reintroduce year-long loans for banks as the sovereign-debt crisis threatens to freeze money markets. Trichet will step down at the end of the month and be succeeded by Italy’s Mario Draghi.

ECB Policy

ECB officials left their benchmark rate at 1.5 percent, as forecast by 41 of 52 economists in a Bloomberg News survey.

Currencies linked to growth rallied against the dollar this week as positive U.S. economic reports diminished concern the recovery is faltering.

Brazil’s real rose the most among major currencies, climbing from a more than two-year low of 1.9549 reached Sept. 22. The currency surged 5.7 percent to 1.7715 per dollar.

Mexico’s peso added 3.2 percent to 13.4598, rising for the first week in five. Australia’s dollar advanced 1.1 percent to 97.68 U.S. cents, touching a one-year low of 93.88 Oct. 4.

“There’s a number of emerging-market currencies where you’ve had very dramatic outflows over the last three to four weeks,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “Those emerging- market currencies are now retracing at a very fast pace. If we have any stability in the U.S., we can have stability in emerging markets.”

U.S. Markets

The S&P 500 Index rose 2.1 percent and the MSCI World index of equities added 2 percent. The Thomson Reuters/Jefferies CRB Index of raw materials rallied 1.8 percent.

U.S. payrolls climbed by 103,000 workers after a revised 57,000 increase the prior month that was more than originally estimated, Labor Department data showed yesterday in Washington. The median forecast in a Bloomberg News survey called for a rise of 60,000. The jobless rate held at 9.1 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners including the euro and yen, fell 0.1 percent to 78.754.

The pound tumbled against its U.S. counterpart after U.K. policy makers said Oct. 6 they would increase their bond- purchase program by 75 billion pounds ($115 billion). The median forecast of economists surveyed by Bloomberg News was for no change. The main rate was maintained at 0.5 percent, as predicted by all 53 economists in a separate survey.

Pound Down

Sterling declined 0.1 percent to $1.5562, and weakened 0.1 percent to 85.97 pence per euro.

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

The Turkish central bank has sold $1.3 billion for liras this week and offered a further $750 million in a daily auction yesterday. The lira has dropped 16 percent against the dollar this year, making it the second-worst performer among 25 emerging-market currencies tracked by Bloomberg after South Africa’s rand.

Bank Rossii sold about $6.8 billion and 591 million euros ($796 million) of its foreign-currency reserves in September, the central bank said on its website yesterday.

The ruble dropped 0.5 percent to 32.3443 per dollar, falling for a sixth straight week. It touched 32.8935 on Oct. 4, the weakest since August 2009.

--Editor: Paul Cox, Greg Storey

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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