Bloomberg News

Euro Touches Seven-Week Low Versus Dollar on Merkel Bond Comment

November 24, 2011

Nov. 24 (Bloomberg) -- The euro touched a seven-week low against the dollar after German Chancellor Angela Merkel said joint euro bonds would send a “wrong signal,” damping optimism about a potential remedy for the region’s debt crisis.

The 17-nation currency fell for a second day against the yen, reversing earlier gains. Australia’s dollar strengthened on speculation investors are buying the currency to diversify their assets away from Europe.

“Merkel’s comments don’t hint at greater integration,” said David Watt, a senior foreign-exchange strategist at Royal Bank of Canada’s RBC Capital Markets unit in Toronto. “Merkel seems to suggest that between taking the less difficult path and the treacherous path, the latter is to be taken.”

The euro closed little changed at $1.3347 at 5 p.m. in New York, after falling to $1.3316, the lowest level since Oct. 6. The shared currency declined 0.2 percent to 102.92 yen. The yen climbed 0.3 percent to 77.12 per dollar.

Joint euro bonds would immediately lead to a convergence of interest rates in the region, Merkel said in comments today at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France.

“This would take us back to where we were before the crisis,” Merkel said.

The euro earlier strengthened against the dollar as German reports showed business confidence improved and economic growth accelerated even with Europe’s debt crisis worsening.

Business Climate

The Munich-based Ifo institute said its business climate index increased to 106.6 this month from 106.4 in October. Gross domestic product advanced 0.5 percent last quarter, the Federal Statistics Office said, confirming an initial estimate published on Nov. 15. That was an acceleration from 0.3 percent growth in the previous three months.

“Risk appetite is looking a bit better,” said Jeremy Stretch, executive director of currency strategy at Canadian Imperial Bank of Commerce in London. “If we see a small improvement in risk or modest rebound in the euro, I wouldn’t necessarily want to run too hard with that.”

Swings in currency markets may be exaggerated today by lower than usual volumes due to the U.S. Thanksgiving holiday, Stretch said.

The yen rose against the euro and advanced against a majority of its 16 most-traded peers after Merkel’s comments, even as Standard & Poor’s said Japan’s lack of progress in tackling its public debt burden put it at risk of a downgrade.

Debt Burden

S&P said Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden, an indication it may be preparing to lower the nation’s sovereign grade.

“Japan’s finances are getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview. It “may be right in saying that we’re closer to a downgrade.”

Fitch Ratings cut Portugal’s credit ranking to below investment grade, citing the country’s weakening economy.

Australia’s dollar snapped a three-day decline on speculation investors are buying the currency in a bid to diversify their holdings amid Europe’s fiscal crisis.

“You are seeing a very, very modest bounce in some of the higher-yielding currencies,” said Callum Henderson, global head of foreign-exchange research in Singapore at Standard Chartered Plc. “The Australian dollar, like other commodity currencies, continues to benefit to some degree from reserve diversification.”

The so-called Aussie gained 0.5 percent to 97.35 U.S. cents after dropping to 96.64 cents yesterday, the weakest since Oct. 6. The currency climbed 0.2 percent to 75.07 yen.

--With assistance from Tony Czuczka in Berlin. Editors: Garfield Reynolds, Naoto Hosoda

To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net

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


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