Bloomberg News

Euro Drops as Germany Sees No Quick Resolution to Debt Turmoil

October 17, 2011

Oct. 17 (Bloomberg) -- The euro fell against the dollar, following last week’s biggest advance in more than two years, as Germany signaled that Europe may take longer to contain its sovereign debt turmoil.

The dollar rose from a one-month low against the currencies of major U.S. trading partners after German Chancellor Angela Merkel’s chief spokesman spurred refuge demand when he said “dreams” of an imminent resolution to the crisis aren’t likely to be fulfilled at an Oct. 23 summit. Currencies tied to global growth such as the Australian and Canadian dollars decreased against the greenback as stocks and commodities fell.

“It’s the premise of what’s happening in Europe,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “Higher-yielding currencies like the Canadian dollar and Aussie tend to be a bit vulnerable in times of risk-off. There’s still a back-and-forth.”

The euro dropped 1 percent to $1.3738 at 5 p.m. New York time after rising to $1.3914, the highest level since Sept. 15. It advanced 3.8 percent last week, the most since March 2009. The shared European currency fell 1.5 percent to 105.55 yen today after touching 107.68, the highest level since Sept. 9. The dollar slid 0.5 percent to 76.83 yen.

The yen rallied from its lowest level in more than a month against the euro and appreciated versus the dollar as the Standard & Poor’s 500 Index fell 1.9 percent and the Thomson Reuters/Jefferies CRB Index of raw materials slid 0.8 percent.

‘Big Bazooka’

“There’s a little bit of risk-off that’s driving the yen,” said Mark McCormick, a foreign-exchange strategist at Brown Brothers Harriman & Co. in New York. “A lot of it comes down to Germany trying to manage everyone’s expectations. While we could potentially avert a meltdown, we still aren’t likely to get the big bazooka that we need to shore up all of Europe’s banking problems.”

Canada’s dollar fell 1.4 percent to C$1.0234 per greenback as oil, the nation’s biggest export, dropped. Crude decreased 1 percent to $86.29 a barrel.

Australia’s currency may have trouble rising beyond its 200-day moving average against the U.S. dollar, a point of resistance, according to Citigroup Inc.

The Aussie has risen 5.1 percent so far this month, partly erasing a 9.8 percent drop in September. It increased today to as high as $1.0372, approaching the moving average of $1.0384, before dropping 1.8 percent to $1.0157.

‘Another Move Lower’

“Our sense is that this $1.0400 area is the level to fade this rally for another move lower again,” Tom Fitzpatrick, chief technical analyst at Citigroup in New York, wrote in a note to clients. Resistance is a level where orders to sell a currency may be clustered.

The South Korean won and Taiwan dollar were the best performers against the dollar among the major currencies after international funds added to holdings of Asian regional assets to benefit from growth in those economies.

Global funds bought $1.5 billion more of Indonesian, South Korean and Taiwanese shares than they sold last week, exchange data show. The won rose 1.4 percent to 1,140.45 per dollar, and Taiwan’s dollar appreciated 0.9 percent to 30.032.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, advanced 0.8 percent to 77.21 on demand for safety in the world’s main reserve currency. It fell earlier to 76.44, the lowest level since Sept. 16.

Germany’s Stance

The euro decreased versus the dollar as Steffen Seibert, the German chancellor’s chief spokesman, said at a news briefing today in Berlin that Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set the Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

Europe’s plan, which has yet to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and increasing the strength of the 440 billion-euro ($606 billion) European Financial Stability Facility, people familiar with the matter said last week.

The euro’s rebound from its weakest levels since January is in jeopardy as banks from UBS AG to Morgan Stanley say they see money flowing out of the currency.

Foreigners were net sellers of European equities in the past five weeks, according to Zurich-based UBS. Morgan Stanley data show that investors have had a net short, or bearish, position in the currency since September.

The euro has advanced 1.3 percent in the past month, according to Bloomberg Correlation-Weighted Currency Indexes, which track 10 developed-nation currencies, trimming its loss over the past six months to 1.5 percent.

--With assistance from Emma Charlton and Lucy Meakin in London. Editors: Dennis Fitzgerald

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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