Bloomberg News

Yen Strengthens After S&P Warns on Europe Ratings; Franc Weakens

December 06, 2011

Dec. 6 (Bloomberg) -- The yen rose versus most of its major counterparts after Standard & Poor’s said it may cut the credit ratings of Germany, France and 13 other members of the euro, spurring demand for the relative safety of Japan’s currency.

The euro pared losses as a report showed German factory orders surged the most in 19 months in October. The Swiss franc declined after a government report showed consumer prices declined in November. Australia’s dollar fell after the central bank reduced interest rates for a second month.

“We’re looking for further yen gains if the situation in Europe deteriorates,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The yen strengthened after the S&P announcement, which has upped the ante on the European policy makers to come up with a more effective response in the near-term.”

The yen gained 0.4 percent to 79.58 per Australian dollar at 6:45 a.m. in New York after rising as much as 1.2 percent. Japan’s currency appreciated 0.1 percent to 104.19 per euro, and rose 0.1 percent to 77.74 per dollar. The euro was little changed at $1.3402.

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 notches for the other governments.

Merkel, Sarkozy

German Chancellor Angela Merkel and French President Nicolas Sarkozy responded in a joint statement yesterday, saying they “took note” of S&P’s move. A closer fiscal union in the EU will “strengthen coordination of budget and economic policy,” and promote stability and growth, the statement said.

The euro trimmed losses after Germany’s Economy Ministry said factory orders, adjusted for seasonal swings and inflation, jumped 5.2 percent from September, when they dropped 4.6 percent. On the year, orders rose 5.4 percent.

‘‘Interestingly the reaction in the euro has been muted” to S&P’s announcement, Steve Barrow, head of research for Group- of-10 nations at Standard Bank Plc in London, wrote in a note to clients. “This might reflect market confidence that there won’t be a downgrade but, perhaps more likely, reflects the fact that many traders and investors want to stay away from the market at this very tricky time of the year.’’

The European Central Bank will cut its benchmark interest rate to 1 percent from 1.25 percent at a policy meeting on Dec. 8, according to the median forecast of economists surveyed by Bloomberg News.

Franc Falls

The franc declined against 13 of its 16 major counterparts after the Federal Statistics Office said consumer prices decreased 0.5 percent from a year earlier, the biggest drop since October 2009.

The Swiss government said last week it is willing to “examine the feasibility of supporting measures” to aid the central bank in its defense of a 1.20 ceiling versus the euro.

“Falling prices in Switzerland, together with the real threat of recession next year, must trigger some further bold action from the SNB,” said Michael Derks, a market strategist at FXPro Financial Services Ltd. in London. “The overvalued exchange rate is doing enormous damage to the economy. They need to be bold once more.”

The franc depreciated 0.3 percent to 92.30 centimes per dollar, and weakened 0.3 percent to 1.2372 per euro.

Aussie Weakens

Australia’s currency dropped for the third time in four days versus the greenback 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. Reserve Bank Governor Glenn Stevens and his board said in a statement that “financing conditions have become much more difficult, especially in Europe.”

“We’re still of the view that the RBA has scope to potentially ease towards 3.75 percent by the end of 2012,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. “The RBA continues to watch data, the global- growth backdrop and global headwinds emanating from the European debt crisis.”

The Australian dollar fell 0.3 percent to $1.0238.

--Editors: Nicholas Reynolds, Matthew Brown

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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