Bloomberg News

Euro Drops to One-Week Low as Europe’s Leaders Meet; Yen Advance

December 09, 2011

Dec. 9 (Bloomberg) -- The euro dropped to a one-week low against the dollar after a summit of European Union leaders failed to forge a unanimous accord, damping prospects for a rapid resolution to the region’s debt crisis.

The euro was poised for weekly losses versus the yen and the greenback as French President Nicolas Sarkozy said British Prime Minister David Cameron made “unacceptable” demands regarding treaty amendments. The yen climbed against the Australian and New Zealand dollars as a decline in Asian stocks dented demand for higher-yielding assets. South Korea’s won weakened after the central bank said the nation’s growth is set to slow and inflation may ease next year.

“I think we are a long way away from a resolution, and I think the risk of disappointment over the weekend would be fairly strong,” said Annette Beacher, head of research at TD Securities in Singapore. “It’s all weighing on the currencies. The euro and the Aussie, they are all way down.”

The euro weakened 0.1 percent to $1.3323 as of 8:29 a.m. in London from $1.3341 yesterday and has declined 0.5 percent since Dec. 2. It earlier fell to as low as $1.3288, the least since Nov. 30. The 17-nation common currency slid 0.1 percent to 103.48 yen and was set for a 0.9 percent drop this week. The yen was little changed at 77.66 per dollar.

The Australian dollar dropped 0.6 percent to 78.45 yen and New Zealand ‘s currency slid 0.6 percent to 59.64 yen. The MSCI Asia Pacific Index of stocks fell 2.1 percent, declining for a second day.

IMF Funds

Sarkozy said EU talks were “extremely difficult” and the U.K. made a treaty of all 27 nations impossible.

Leaders agreed to channel as much as 200 billion euros ($266 billion) to the International Monetary Fund and bowed to European Central Bank demands for a tightening of anti-deficit rules. They accelerated the startup of a planned 500 billion- euro rescue fund and scaled back bondholder loss-sharing provisions.

The euro pared declines after ECB President Mario Draghi called the decisions “a very good outcome for euro-area members,” after 12 hours of talks in Brussels.

Germany and France risk losing their AAA credit ratings in a review of 15 euro nations, Standard & Poor’s said Dec. 5, as the region struggles to end its sovereign debt crisis.

“It certainly does look to form the basis of a good fiscal compact and more discipline in the area,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. An affirmation of the sovereign ratings by S&P “would be positive for the euro and could pave the path for a short squeeze toward $1.35.”

Weaker Euro Forecast

Analysts have lowered forecasts for the euro since the end of September as policy makers struggled to resolve the region’s debt crisis. The median forecast of 50 estimates for the euro- dollar rate by the end of the first quarter 2012 was $1.38 on Sept. 30, according to data compiled by Bloomberg. As of Dec. 8, the median forecast of 41 analysts showed the euro will weaken to $1.30 over the same period.

The yen and dollar climbed against a majority of their most-traded counterparts as Chinese stocks slid after the nation’s statistics bureau said industrial output rose 12.4 percent in November from a year earlier, the slowest pace since August 2009. Consumer prices climbed 4.2 percent from a year earlier, lower than all estimates in a Bloomberg News survey of 35 economists that had a median forecast of 4.5 percent.

Korean Economy Slowing

South Korea’s won dropped after its central bank said the economy is likely to grow 3.7 percent next year, slowing from a 3.8 percent gain in 2011. Inflation is forecast at 3.3 percent, compared with 4 percent this year, it said. The Bank of Korea held borrowing costs at 3.25 percent for a sixth month yesterday.

“The weak forecast for the economy is supporting demand for the dollar,” said Byeon Ji Young, a Seoul-based currency analyst at Woori Futures Co.

The won slid 1.3 percent to 1,146.83 per dollar, the biggest decline since Nov. 10.

The dollar tends to strengthen during periods of financial stress because of its position as the world’s reserve currency. The yen gains as Japan’s export-reliant economy doesn’t need foreign capital to balance current accounts -- the broadest measure of trade.

Japan’s economic recovery following two straight quarters of contraction and a record earthquake in March is threatened by slowing global growth and a yen rate that is near post-World War II highs against the dollar.

The nation’s economy grew less than the government’s initial estimate last quarter as companies reduced investment on concern overseas demand was stalling. Gross domestic product increased at an annualized 5.6 percent in the three months ended Sept. 30, the Cabinet Office said today, compared with a preliminary figure of 6 percent.

The yen has climbed 1.4 percent in the past month, the best performer among 10 developed market currencies tracked by Bloomberg Correlation Weighted Indexes. The dollar has gained 1.2 percent and the euro has lost 0.6 percent.

--With assistance from Candice Zachariahs in Sydney. Editor: Jonathan Annells

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

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


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