Bloomberg News

Euro Slides After Draghi Says Didn’t Signal More Bond Purchases

December 09, 2011

Dec. 8 (Bloomberg) -- The euro fell the most in two against the yen and slumped versus the dollar after European Central Bank President Mario Draghi said he didn’t signal stepping up bond purchases to spur growth.

The 17-nation currency reached the lowest level this month versus the greenback, reversing brief gains, after Draghi’s comments damped speculation that the ECB would expand its bond- buying role to stem the region’s debt crisis. The yen rose on increased demand for safety as European leaders gathered in Brussels for a two-day meeting to address the debt crisis. Australia’s dollar fell.

“The pullback in the euro rally was a reaction to President Draghi downplaying expectations that the ECB will act more aggressively to support the peripheral bond markets,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The euro is still in a challenging position vis- a-vis the possible policy outcomes, especially from the ECB.”

The euro weakened 0.6 percent to 103.57 yen at 5 p.m. in New York after falling as much as 1.1 percent, the most since Nov. 14. The single currency dropped 0.5 percent to $1.3341. The yen was little changed at 77.64 per dollar.

Draghi said during a press conference in Frankfurt that he was “kind of surprised by the implicit meaning” that was given to his comments last week when he said the ECB could follow faster fiscal union with “other elements.”

Draghi’s Surprise

“So the market misinterpreted the fiscal compact argument that Draghi used at the European Parliament,” said Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. The focus is back on Europe’s two bailouts funds, the European Financial Stability Facility and the European Stability Mechanism, “although as we know they have limited, inadequate firepower.”

Italian and Spanish bonds declined after Draghi’s comments. The yield on 10-year Italian bonds climbed 47 basis points, or 0.47 percentage point, to 6.46 percent and the yield on similar- maturity Spanish debt advanced 38 basis points to 5.81 percent.

The cost of insuring against default on sovereign debt rose the most in five months today. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbed 31 basis points to 363, the biggest jump since July.

The Australian dollar fell from an almost four-week high versus the yen after the statistics bureau said the number of people employed declined by 6,300 last month after rising by a revised 16,800 the prior month.

Aussie Jobs

“Full-time jobs dropped a lot,” said Lee Wai Tuck, a strategist at Forecast Pte in Singapore. “This will trigger some concerns over the jobs market in Australia and, of course, the economy. The Aussie dropped.”

Australia’s currency weakened 1.3 percent to 78.93 yen after rising to 80.52 yen on Dec. 2, the strongest since Nov. 9. The Aussie slid 1.2 percent to $1.0167.

The yen advanced the most against the South African rand and Mexican peso as investors sought safer assets.

Standard & Poor’s yesterday placed the European Union’s AAA long-term rating on “creditwatch negative” after a similar action a day earlier on 15 of the 17 euro members. The company said on Dec. 5 it may lower the ratings of Germany and other members of the euro due to “continuing disagreements” about how to tackle the sovereign-debt crisis.

“S&P has told Europe that they need to do something, Draghi is saying that the ECB is doing what they can but they’re not going to be rushing to fix anything, so there’s definitely more tension being put onto the summit,” said Brian Kim, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc.

Euro Debts

Euro-area governments have to repay more than 1.1 trillion euros ($1.5 trillion) of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. The ECB has bought a total of 207 billion euros of sovereign bonds during the region’s crisis in an effort to stem surges in bond yields.

The euro gained as much as 0.4 percent versus the dollar earlier after the ECB offered lenders as much money as they need for three years and loosened collateral rules at refinancing operations to ease strains in credit markets.

The ECB cut its benchmark interest rate by a quarter- percentage point to 1 percent, matching a record low, as expected by 55 of 58 economists in a Bloomberg News survey. The central bank also cut banks’ reserve ratios to 1 percent from 2 percent and will stop fine-tuning operations at the end of each reserve maintenance period, Draghi said.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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


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