Bloomberg News

Euro Slips to 11-Year Low Versus Yen as Debt Woes Enter New Year

January 02, 2012

Jan. 2 (Bloomberg) -- The euro slipped to an 11-year low against the yen, before paring declines, on concern that the European debt crisis will hamper economic growth and destabilize financial markets as 2012 begins.

The single currency weakened against the dollar as a report confirmed European manufacturing shrank for a fifth straight month in December. German Chancellor Angela Merkel said in a New Year’s speech she expects turbulence this year and will do “everything” to save the euro and end the region’s debt crisis. Sterling weakened against all major currencies as Prime Minister David Cameron pledges more action to deal with “excess” in pay in the finance industry.

“We remain negative about the euro,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva. “Lack of growth in peripheral nations will be a major issue there this year, and I don’t think what leaders have proposed will be enough to ring-fence the economic problem. Concern about debt sustainability in peripheral countries will escalate.”

The euro fell to as low as 98.66 yen, the least since December 2000, before trading 0.3 percent lower at 99.40 yen at 4:26 p.m. London time. It weakened 0.3 percent to $1.2924.

The euro posted its first back-to-back annual declines against the dollar in a decade last year. It was also the worst performer among 10 developed-nation currencies in 2011, sliding 2.1 percent, according to Bloomberg Correlation-Weighted Indexes.

Pound Declines

The pound fell 0.4 percent to $1.5480 and 0.3 percent to 119.056 yen. It weakened 0.2 percent to 83.50 pence per euro. Sterling gained 0.6 percent in the past month against the other nine developed-nation currencies gauged by Bloomberg Correlation-Weighted Indexes, outperforming the euro, the Swiss franc, the Norwegian krone and the Swedish krona.

European leaders pledged to draft a stricter rulebook for controlling government spending for the more than two-year-old debt crisis. Merkel and French President Nicolas Sarkozy will meet in Berlin on Jan. 9 to work out details.

A gauge of euro-region manufacturing was 46.9 in December versus 46.4 in the previous month, London-based Markit Economics said today. That’s in line with an initial estimate published on Dec. 15. A reading below 50 indicates contraction. While the gauge for German manufacturing exceeded economist forecast, it remained below 50.

“Euro-zone manufacturing is clearly undergoing another recession,” Chris Williamson, chief economist at Markit, said in today’s report. “Despite the rate of decline easing slightly in December, production appears to have been collapsing across the single-currency area at a quarterly rate of approximately 1.5% in the final quarter of 2011.”

ECB Deposits

The euro pared losses as the European Central Bank said today overnight deposits from financial institutions fell, after reaching an all-time high last week.

Euro-area banks parked 413.9 billion euros with the Frankfurt-based ECB, down from 445.7 billion euros the previous day. Deposits reached 452 billion euros on Dec. 27, the most since the euro’s introduction in 1999, a sign banks were reluctant to lend as concern about counter-party risk deepened.

The ECB has reduced its benchmark rate to 1 percent, matching a record low, and flooded banks with cheap loans in an effort to keep credit flowing to the economy. It has resisted pressure to step up its bond purchases, putting the emphasis on governments to solve the debt crisis with fiscal reforms.

The euro will weaken to $1.30 and 99 yen by the end of the first quarter, according to analyst forecasts compiled by Bloomberg, as the debt crisis drags on.

Germany’s government today declined to comment on a report that it may push creditors to accept bigger losses on Greek debt than previously agreed upon, saying only that talks on lowering Greece’s debt level may end soon.

Germany is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater sustainability, Greek news website Euro2day.gr reported today, without citing anyone.

--Editors: Mark McCord, James Kraus

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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