Dec. 6 (Bloomberg) -- The euro fell against the yen after Standard & Poor’s warned it may downgrade the European Financial Stability Fund reinforcing concern that policy makers haven’t contained the region’s debt crisis.
The euro rose erased losses against the dollar after the Financial Times reported European governments may combine the temporary and planned permanent rescue facilities to increase funding before a summit this week. Canada’s dollar strengthened against most of its major counterparts as the central bank kept interest rates unchanged and Governor Mark Carney noted stronger economic data in the U.S. and Canada. The Swiss franc weakened against all its major counterparts after consumer prices dropped in November.
“The EFSF downgrade has more potential impact than any individual downgrade in the euro zone,” said Tommy Molloy, chief dealer at FX Solutions, a currency brokerage in Saddle River, New Jersey. “Apart from the general knee jerk reaction the whole market has shrugged off the S&P warning and the euro is at $1.34 as we wait for the EU Summit later this week.”
The euro was little changed at $1.3402 at 5 p.m. in New York after gaining as much as 0.2 percent. The 17-nation currency dropped 0.1 percent to 104.17 yen. The dollar weakened 0.1 percent to 77.73 yen.
The Financial Times reported the funding proposal was being debated ahead of the Dec. 8 summit. Bloomberg News reported on Oct. 20 that negotiations over pairing the two funds were happening, according to two people familiar with the discussions. Operating the ESM in combination with the 440 billion-euro ($590 billion) temporary fund next year would potentially boost Europe’s anti-crisis resources to 940 billion euros.
“The fact that there would be more money available would be a good thing because that has been a criticism of previous plans,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford Connecticut. “The market is playing optimism ahead of the summit; the expectations are not for a final proposal on Friday but anything showing modest signs of progress will be well received.”
The franc declined 0.6 percent to 92.59 centimes per dollar, and weakened 0.6 percent to 1.2409 per euro after the Federal Statistics Office said consumer prices decreased 0.5 percent from a year earlier. That is the biggest drop since October 2009.
“The latest economic data out of Switzerland suggests that deflation is biting even harder than expected,” Sebastien Galy, a London-based senior foreign-exchange strategist, wrote in an e-mailed report. “Faced with the hit on growth and inflation, the odds of a move by the SNB are rising. The ECB is also potentially at risk of a move to loosen monetary policy which could pressure euro-Swiss franc lower.”
The franc may decline to between 1.25 and 1.37 per euro during the next six months, Galy wrote.
The Swiss government said last week it’s willing to “examine the feasibility of supporting measures” to aid the central bank in its defense of a 1.20 ceiling versus the euro.
Australia’s dollar fell against the dollar after the Reserve Bank cut its key cash rate target by a quarter- percentage point to 4.25 percent. The decision completed the first back-to-back easing since February 2009.
The Australian dollar weakened 0.3 percent to $1.0245.
Canada’s dollar strengthened 0.6 percent to C$1.0100 per U.S. dollar after the Bank of Canada kept its benchmark rate at 1 percent.
“On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected in October,” the central bank’s statement said. “Recent economic data suggest that growth in the United States has been slightly more robust than anticipated.”
S&P added the bailout fund today to the 15 euro nations placed on a negative outlook yesterday before a summit meeting this week.
The euro area’s six AAA rated countries are among those placed on a negative outlook, and their ratings may be cut depending on the result of a summit of European leaders on Dec. 9, S&P said yesterday in a statement. The company said ratings may be cut by one level for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg, and by up to two levels for the other governments.
“We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the ‘AAA’ sovereign ratings, which are currently on CreditWatch, on one or more of EFSF’s guarantor members,” S&P said in a statement today.
The facility’s 2.75 percent bonds due July 2016 fell after Standard & Poor’s said it placed the fund on watch negative. The notes fell to 101.42 cents on the euro, according to Bloomberg Bond Trader prices.
Nomura International Plc cut its forecast for the euro to $1.20, citing the risk that Italy will default next year if the European Central Bank fails to step up support for the country.
The shared currency is down 1 percent this month against nine developed nation currencies, according to Bloomberg Correlation-Weighted Indexes. The dollar has gained 2 percent and the yen is up 2.5 percent.
--With assistance from Gabi Thesing, Lucy Meakin and Keith Jenkins in London. Editors: Paul Cox, Dave Liedtka
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