Bloomberg News

Euro Weakens After Fitch Warns of Downgrade for France, Italy

December 16, 2011

Dec. 16 (Bloomberg) -- The euro dropped against the majority of its most-traded counterparts as concern increased that the region’s leaders won’t be able to contain the sovereign-debt crisis after Fitch Ratings put France on negative outlook and said six other European nations may be downgraded.

The 17-nation currency erased earlier gains against the dollar as Fitch revised its outlook on the ratings of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus to negative, and said France is more exposed to the crisis than other top-rated euro- zone countries. Canada’s currency fell, erasing earlier gains, as European ratings concern damped demand for higher-yielding assets.

“There is a positive and negative camp and Fitch is obviously in the negative,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The market is ahead of the ratings agency and the declines we’ve seen in the euro is pricing in a probability of a ratings cut.”

The euro gained 0.2 percent to $1.3046 at 5 p.m. in New York, after gaining as much as 0.5 percent. It fell 2.5 percent this week, the biggest such decline since the five-day period ended Sept. 9. The shared currency rose 0.1 percent to 101.47 yen. The Japanese currency rose 0.1 percent to 77.76 per dollar.

Annual View

The euro has depreciated 0.8 percent this year against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Indexes. The yen has advanced 4.8 percent and the dollar has gained 1.7 percent.

New Zealand’s dollar, nicknamed the kiwi, rose the most among the 16 major currencies tracked by Bloomberg, adding 1.1 percent to 76.18 U.S. cents, paring its loss this week to 1.8 percent. Canada’s currency fell 0.3 percent to C$1.0383 and the nation’s 10-year bond yields fell below 1.9 percent for the first time.

Fitch said a “comprehensive solution” to the euro-zone crisis is “technically and politically beyond reach.” The company said Dec. 12, without taking any action, that a European Union leaders’ summit last week did little to ease pressure on Europe’s sovereign bond ratings.

Standard & Poor’s put 15 of the 17 euro nations on “creditwatch negative” last week, pending the outcome of last week’s summit and the actions of central bankers. The ratings company said it would conclude its review of the ratings “as soon as possible” following the leaders’ meeting.

Belgium had its local- and foreign-currency government bond cut by two levels to Aa3 from Aa1 by Moody’s Investors Service, which cited factors including “the sustained deterioration” in funding conditions.

Euro Plan

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency. They agreed to move up the creation of the permanent European Stability Mechanism and said that by March the EU will reassess plans to cap the overall lending of the ESM and the temporary rescue fund at 500 billion euros ($651 billion).

The euro earlier gained after Luxembourg’s Jean-Claude Juncker said Europe should meet a deadline for arranging loans with the International Monetary Fund as part of a crisis- fighting package.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 122 basis points below the euro interbank offered rate, 18 basis points lower than yesterday’s 140 basis points. The measure reached 162 in November, which was the highest level since October 2008.

Inflation Data

The cost of living in the U.S. stagnated last month as gasoline prices dropped, supporting the Federal Reserve’s view that inflation remains in check.

The unchanged reading in the consumer-price index last month followed a 0.1 percent decline the prior month, a report from the Labor Department showed today in Washington. That compares with a 0.1 percent increase forecast in a Bloomberg News survey of 82 economists.

The Fed’s policy-setting panel said on Dec. 13 the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, dropped 0.1 percent to 80.139.

Futures traders increased their bets to a record level that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 116,457 on Dec. 13, compared with net shorts of 95,814 a week earlier.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

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


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