Bloomberg News

Euro Drops After Italian Bond Sale; Yen Approaches Record High

October 28, 2011

Oct. 28 (Bloomberg) -- The euro declined from almost a seven-week high against the dollar and yen as a rise in Italian borrowing costs raised concern European Union leaders haven’t done enough to stem the region’s debt crisis.

Europe’s currency weakened after posting its biggest gain in more than a year against the greenback yesterday, when leaders announced a way to prevent a Greek default and safeguard banks. Brazil’s real was the best performer among major counterparts as the central bank sold dollars. The yen climbed toward a postwar record against the dollar, spurring bets Japan will intervene to weaken its currency.

“It’s hard to sustain the kind of gains we saw in the euro even in the best of times,” said Shahab Jalinoos, a senior currency strategist at UBS AG in Stamford, Connecticut. “You have to try to get a sense if the measures that were announced deal with the underlying problems effectively or not.”

The euro decreased 0.5 percent to 107.28 yen at 5 p.m. New York time after rising yesterday to 108.14, the highest level since Sept. 8. Europe’s currency pared its weekly gain to 1.2 percent. The euro dropped 0.3 percent to $1.4147 after earlier sliding 0.4 percent. It reached $1.4247 yesterday, the highest level since Sept. 6. The yen rose 0.2 percent to 75.82 per dollar after appreciating yesterday to a post-World War II record of 75.66.

U.S. Stocks

The Standard & Poor’s 500 Index erased its decline, paring demand for a refuge in the greenback.

Brazil’s real rose to a seven-week high versus the dollar as the central bank sold currency swaps four times starting in September, reversing a 28-month-old strategy aimed at stemming the currency’s rally. The real gained 2.2 percent to 1.6721 per dollar after reaching 1.6720, the highest since Sept. 9.

South Korea’s won rose after the central bank said the current account surplus increased to $3.1 billion in September from $293 million in the previous month. The nation last recorded a deficit in February 2010. The won touched 1,100.70, the strongest level since Sept. 16, before trading 0.9 percent higher at 1,104.88.

The Australian dollar slid 0.3 percent to $1.0700 after rising yesterday to $1.0753, the highest level since Sept. 1. The currency’s 3.2 percent gain against the U.S. dollar yesterday was the biggest since May 2010.

The seven-day relative strength index for the Australian currency versus the dollar was at 76.14. A reading above 70 signals an asset’s price may have risen too quickly.

Rescue Fund

The euro rose 2 percent yesterday against the dollar, the most since July 2010, after European Union leaders agreed to increase the region’s rescue fund capacity to 1 trillion euros ($1.4 trillion) and persuaded holders of Greek bonds to accept a 50 percent writedown on the country’s debt.

If it’s accepted, “the 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria,” Fitch Ratings said in a statement today. The accord is “ a necessary step to put the Greek sovereign’s public finances on a more sustainable footing.”

“It’s interesting that Fitch is stating what most people see as obvious that there has been a selective default in Greece,” said David Mann, regional head of research for the Americas at Standard Chartered in New York. “This is not a rally that people expect to last, so we would sell the euro at present levels and certainly if we have a pop back up to around $1.4250.” Mann recommends use of options to avoid volatility.

Italian Auction

Italian Prime Minister Silvio Berlusconi conducted the first test of investor enthusiasm for Europe’s debt since the summit’s plan was announced, selling bonds today at euro-era record borrowing costs.

The Treasury in Rome sold 7.93 billion euros, less than the maximum 8.5 billion-euro target, of four different bonds today. The yield on Italy’s benchmark 10-year bond rose 11 basis points, or 0.11 percentage point, to 5.98 percent.

IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against the currencies of six major U.S. trading partners, was little changed at 75.085, having dropped 1.6 percent this week on reduced demand for a refuge.

The Thomson Reuters/University of Michigan final index of consumer sentiment increased to 60.9 this month from 59.4 in September. The gauge was projected to drop to 58, according to the median forecast of 66 economists surveyed by Bloomberg News. The preliminary reading for the month was 57.5.

Bets Versus Dollar

Hedge funds and other large speculators this week reduced bets that the dollar will gain against major counterparts, the Commodity Futures Trading Commission reported today. Net bets the greenback will rise against the yen, euro, Australian dollar, Swiss franc, Canadian currency, pound, Mexican peso and New Zealand dollar dropped to 86,271 contracts for the week ended Oct. 25.

The yen is the biggest gainer among 10 developed-nation currencies in the past six months, rising 11 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The appreciation has led Nintendo Co., the world’s largest maker of video-game machines, to forecast its first annual loss in at least 30 years. Japanese Finance Minister Jun Azumi said he will take “bold” action against the strong yen if needed.

--With assistance from Emma Charlton in London and Masaki Kondo in Tokyo. Editors: Dennis Fitzgerald, Greg Storey

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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