Bloomberg News

Euro Sinks Before Debt Crisis Summits; Dollar Falls to Record

October 22, 2011

Oct. 22 (Bloomberg) -- The euro dropped the most against the Swiss franc in almost two months and fell versus the yen as European leaders prepared for two summits over the next four days to battle the sovereign debt crisis.

The dollar declined yesterday to a post-World War II low against the yen on speculation the Federal Reserve may seek further monetary easing and bets the Japanese government will struggle to stem its currency’s gains. The Swiss franc rose this week against most of its major counterparts on demand for a refuge from Europe’s fiscal turmoil.

“I wouldn’t be holding my breath about the summit this weekend because the second summit coming next Wednesday means we probably won’t get anything concrete,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said yesterday. “I would not be long on the euro, but I would not be surprised to see it rally with positive development from this meeting. I would use a rally to get short on the euro for the longer term.” A short is a bet an asset will drop.

The euro depreciated 1 percent to 1.2262 Swiss francs this week. It decreased 1.2 percent to 105.97 yen and traded at $1.3896. The dollar fell 1.2 percent to 76.29 yen after dropping yesterday to the post World War II low of 75.82 yen. It was the biggest weekly slide in the U.S. currency since Aug. 12.

Implied volatility for the currencies of the Group of Seven nations touched 13.3 percent this week, the highest level since Oct. 7, according to a JPMorgan Chase & Co. index.

Stronger Pound

Sterling rallied to a six-week high against the dollar after Britain’s budget deficit narrowed in September more than economists forecast as Chancellor of the Exchequer George Osborne’s spending cuts took hold. The pound advanced 0.8 percent to $1.5953 after rising yesterday to $1.5974, the highest level since Sept. 9.

Canada’s dollar ended the week at C$1.0066 versus the U.S. currency, up 0.3 percent, before an Oct. 25 meeting of the central bank. The Bank of Canada will keep its target rate for overnight lending at 1 percent, according to all 25 economists in a Bloomberg News survey.

The 17-nation euro had its biggest five-day drop against the franc since it fell 4.2 percent during the week ended Sept. 2, four days before the Swiss National Bank established a minimum rate of 1.20 to stem its currency to help exporters.

European finance ministers met yesterday, followed by a planned gathering of ministers from all 27 European Union countries today. EU and euro-area leaders convene tomorrow, to be capped by another euro summit Oct. 26.

France Retreats

France retreated in a clash with Germany over how to expand the power of Europe’s bailout fund. France’s view that the fund should get a banking license enabling it to borrow from the European Central Bank “is not a definitive point of discussion for us,” French Finance Minister Francois Baroin told reporters.

“Everybody’s making the assumption that the Europeans will come up with something that will be good enough to muddle through,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York.

Greece’s Prime Minister George Papandreou won the backing of a majority of lawmakers this week in a second test of support for a new austerity package. Police used tear gas to disperse protesters.

IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against six major U.S. trading partners, dropped for a third week, falling 0.4 percent to 76.276 as investors speculated that further monetary easing by the Fed may debase the world’s main reserve currency.

Yellen’s View

Fed Vice Chairman Janet Yellen said yesterday in a Denver speech that a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil. The comments followed Fed Governor Daniel Tarullo’s call for a resumption of large-scale purchases of mortgage bonds.

Hedge funds and other large speculators pared their net long dollar positions to 126,628 in the week ended Oct. 18 after reaching 132,835 in the prior week, the most since June 2010, according to Commodity Futures Trading Commission data released yesterday. The figures measure futures contracts on dollar bets against the euro, yen, Australian, Canadian and New Zealand dollars, pound, Swiss franc and Mexican peso.

The yen was the best performer over the past week among the 10 developed-nation currencies that are tracked by Bloomberg Correlation-Weighted Currency Indexes, rising 0.9 percent. The euro dropped 0.3 percent, and the Swiss franc rose 0.7 percent.

Japan Proposal

Japan’s government will add 2 trillion yen ($26 billion) to the 8 trillion yen in foreign-exchange reserves being shifted to the state-run Japan Bank for International Cooperation to aid exporters and spur acquisitions overseas, a document obtained by Bloomberg News shows.

A further 2 trillion yen will be allocated to encourage investment in domestic plants and to hire workers, according to another document obtained from two government officials who declined to be identified because the plan isn’t public.

The dollar fell this week to a post-World War II low against the yen following a 4.51 trillion-yen intervention in August by Japan.

“Folks have decided that the measures proposed by the government to weaken the yen were far too weak,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London.

--Editors: Dennis Fitzgerald, Greg Storey

To contact the reporters on this story: Allison Bennett in New York at; Catarina Saraiva in New York at

To contact the editor responsible for this story: Dave Liedtka at

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