Bloomberg News

Euro Loses Most Since September as Debt Yields Surge in Crisis

November 20, 2011

Nov. 19 (Bloomberg) -- The euro had its biggest loss versus the yen since September as European borrowing costs at almost euro-era records sapped confidence the region’s governments will be able to deal with their debt crisis.

The 17-nation currency rose for the week against the New Zealand and South African currencies amid reports talks may start on the European Central Bank lending to the International Monetary Fund for sovereign bailouts. The U.S. dollar gained against all of its 16 most-traded peers but the yen as investors sought safety, sending stocks and commodities lower as a Nov. 23 deadline loomed for Congress’s deficit-reduction supercommittee.

“Sovereign spreads have become a huge risk barometer, more so than equities,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said yesterday. “You need to see a meaningful decline in Italian benchmark yields before the market and the euro can think about shrugging this off.”

The euro slid 2 percent to 104 yen in its biggest weekly decline since Sept. 23. It dropped for a third consecutive week versus the dollar, losing 1.6 percent to $1.3525. The greenback fell 0.4 percent to 76.91 yen and touched 76.58 yesterday, the weakest level since reaching a post-World War II low of 75.35 yen on Oct. 31.

The European currency pared losses for the week as Italian government bond yields fell below 7 percent, the threshold at which Greece, Ireland and Portugal sought bailouts, after the ECB purchased the debt. Ten-year yields declined yesterday to 6.64 percent.

Yield Premium

The extra yield investors demand to lend to Italy rather than Germany for 10 years was 5.29 percentage points on Nov. 15, after reaching a euro-era record of 5.53 percentage points on Nov. 9 on concern Europe’s debt crisis would spread. The gap narrowed yesterday to 4.67 percentage points.

The ECB bought larger-than-usual quantities of Italian debt Nov. 16 and 17 and yesterday, according to people with knowledge of the trades. They declined to be identified as the deals are private. Several also said the bank purchased Spanish bonds. An ECB spokesman declined to comment.

“There is very much the story of the broadening of contagion to the core,” Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York said Nov. 16. “We’re still in a market where any kind of longer-term player is much more comfortable selling on the euro upside than buying the downside.”

The euro slid 1.2 percent over the past six months versus nine developed-nation peers tracked by Bloomberg Correlation- Weighted Currency Indexes as European leaders struggled to contain the sovereign debt crisis. The yen gained 9.7 percent and the dollar rose 4.3 percent.

Risk Demand Ebbs

New Zealand’s dollar, nicknamed the kiwi, and South Africa’s rand were the biggest losers against the euro among its major counterparts as the European turmoil sapped risk demand. The kiwi tumbled 3.7 percent to 75.65 U.S. cents, and the rand dropped 3.2 percent to 8.1975 per dollar.

The Standard & Poor’s 500 Index retreated 3.8 percent, and the S&P GSCI Index of raw materials dropped 2.6 percent.

The franc fell versus the dollar and euro, sinking 1.9 percent to 91.66 centimes to the greenback and slipping 0.2 percent to 1.2398 per euro. It has depreciated 10 percent against the euro and 14 percent versus the dollar since Sept. 5, the day before the Swiss National Bank imposed a ceiling at 1.20 per euro to stem franc gains, which were hurting exporters.

“The Swiss National Bank just has more credibility, because they’ve said they’ll do whatever it takes, and the market really believes them,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York said Nov. 15.

Dollar Index Rises

IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, rose 1.5 percent to 78.023.

U.S. 10-year notes gained this week as investors sought refuge, pushing the yield on the benchmark security down five basis points, or 0.05 percentage point, to 2.01 percent.

Members of the congressional supercommittee are seeking a path forward on stalled deficit-reduction talks as next week’s deadline draws near. There was little sign Republicans are budging on their anti-tax stance or that Democrats will agree to major changes to entitlement programs.

If the deadlock continues past the deadline, at least $1.2 trillion in automatic spending cuts would take effect in 2013, split between defense and domestic discretionary programs.

Positive for Dollar

“Arguably that will fall short, and abstracting from the long-term consequences, any concern surrounding those negotiations would be positive for the dollar and negative for global currencies,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, said yesterday.

The euro gained yesterday for the first day in a week as Dow Jones Newswires reported European officials may start talks with the IMF on a mechanism for the ECB to lend to it for sovereign bailouts in the region. Agreement on the proposal may result in an announcement at a European Union summit Dec. 9, the news agency reported, citing two unidentified people with direct knowledge of the matter.

“If this story stays relevant and seems credible, the market will hold because it’s the one story that has hit the tape that seems to have the respect of the traders,” said Boris Schlossberg, director of research at the online currency-trading firm GFT Forex in New York.

The cost for European banks to fund in dollars reached three-year highs for four straight days this week. Three-month cross currency basis swaps, the rate banks pay to convert euro payments into dollars, fell as much as 1.32 percentage points below the euro interbank offered rate yesterday, the most expensive since December 2008, data compiled by Bloomberg show.

--Editors: Greg Storey, Dave Liedtka

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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