Bloomberg News

Euro Falls to 2-Month Low as Moody’s Says Summit Not Decisive

December 12, 2011

Dec. 12 (Bloomberg) -- The euro fell to the lowest level in two months versus the dollar as Moody’s Investors Service said it will review the ratings of European Union nations after last week’s summit failed to produce decisive steps to end the debt crisis.

The dollar and yen strengthened against a majority of their most-traded counterparts as investors sought safer assets on concern crisis-fighting efforts are failing to stop European borrowing costs from rising. Sweden’s krona weakened as stocks declined amid reduced demand for higher-yielding investments. China’s yuan appreciated after the nation’s central bank signaled the currency will be allowed to trade more freely.

“It’s been an ongoing erosion of optimism after the EU leaders’ announcement,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “As markets continued to digest the announcement, they started taking a more negative view, which was reinforced by comments by Moody’s. It’s a fairly risk-off day.”

The euro fell 1.5 percent to $1.3187 at 5 p.m. in New York, touching the lowest level since Oct. 4. The currency slid 1.1 percent to 102.76 yen. The dollar advanced 0.4 percent to 77.94 yen.

The euro has fallen 1.6 percent in the past month, the biggest loser among 10 developed-nation currencies according to Bloomberg Correlation-Weighted Indexes. The dollar gained 3.1 percent, the best performer, and the yen advanced 2.1 percent.

Bond Yields

Italian bonds slid as the nation sold 7 billion euros ($9.3 billion) of one-year bills to yield 5.95 percent, compared with an average 2.70 percent in the past five years. The securities fell even after the European Central Bank was said to have bought the nation’s debt. Italy has to repay about 53 billion euros in the first quarter, about a third of the region’s maturing bonds.

Sweden’s krona fell to the weakest this month versus the dollar as the Standary & Poor’s 500 Index declined 1.5 percent.

The krona dropped 2.2 percent to 6.8737 per dollar after sliding to 6.8266, the weakest since Nov. 30. It depreciated 0.7 percent to 9.0648 per euro.

The euro fell to the lowest level in nine months against the pound, dropping below 85 pence. It sunk 0.9 percent to 84.62 and touched 84.52 pence, the lowest level since Feb. 23.

Market Mood

“The market continues to be disappointed by the developments in Europe late last week.” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “As investors continue to digest the latest details of the EU agreement, the plan continues to come up short in terms of near-term measures that will aid the stresses in the sovereign credit markets.”

Brazil’s real dropped the most against the dollar among the 16 major currencies tracked by Bloomberg. It lost 2.6 percent to 1.8440 per dollar.

The Standard & Poor’s 500 Index dropped 1.5 percent and crude oil fell 1.5 percent to $97.88 a barrel. Yields on the benchmark 10-year Treasury bond fell five basis points to 2.01 percent.

The yuan rose after the Financial News reported Xuan Changneng, head of the People’s Bank of China’s financial stability bureau, as saying policy makers will maintain flexibility while pushing forward with interest-rate and exchange-rate reform.

“The PBOC’s comment quelled investors’ depreciation expectations after the weaker export growth,” said Kenix Lai, a currency analyst at Bank of East Asia Ltd. in Hong Kong “The stronger fixing also shows that China will still allow gains in the currency, even though the pace may slow.”

The yuan gained 0.05 percent to 6.3609 per dollar, after falling 0.08 percent last week.

European Plan

European leaders unveiled a blueprint after meetings on Dec. 8 and 9 for a closer fiscal accord, adding 200 billion euros to their bailout fund and tightening rules to curb future debts. They also said they would start a 500 billion-euro rescue fund next year.

The agreement offered few additional measures and doesn’t diminish the risk of credit-ranking revisions, Moody’s said in its Weekly Credit Outlook. “Our intention as announced in November is to revisit the level and dispersion of ratings during the first quarter of 2012,” the company said.

S&P’s put the EU’s AAA rating on “creditwatch negative” last week after similar action on 15 of the 17 euro nations, pending the outcome of last week’s summit and the actions of central bankers.

Fitch Ratings said today, without taking any action, that the summit did little to ease pressure on Europe’s sovereign bond ratings.

Merk Investments LLC cut the euro position of its Hard Currency Fund to 14 percent, the lowest in the fund’s six-year history, citing the need for more banking system support in Europe amid the region’s crisis.

“Only when the banking system is secure enough, that’s when the market is going to quiet down,” Axel Merk, the president and chief investment officer of the eponymous firm, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “As long as there’s no focus, we’ll get this grinding down.”

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

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


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