Bloomberg News

Euro’s First Back-to-Back Losses Since 2001 Cap Debt-Crisis Year

January 03, 2012

Dec. 31 (Bloomberg) -- The euro had a second consecutive annual loss against the dollar for the first time in a decade as rising yields on the region’s sovereign debt reflected speculation about defaults and stalling economic growth.

In its 13th year of existence, the 17-nation currency fell below 100 yen for the first time since 2001 as the region’s leaders bailed out Portugal, and Italy, with the world’s third- largest bond market, had its worst year since at least 1992. The Swiss franc rose against a majority of its most-traded counterparts as Europe’s debt crisis spurred demand for safety. Japan’s currency’s average price was the strongest on record versus the greenback even after three interventions to weaken the yen by the nation’s central bank.

“It really has been all about the euro this year,” said Mary Nicola, a New York-based currency strategist at BNP Paribas SA. “It’s been a back-and-forth year for the euro and the focus has been on politicians and how the politicians would react.”

The euro declined 3.2 percent to $1.2961 against the dollar in New York It reached a high of $1.4940 on May 4 on speculation the European Central Bank would raise interest rates and touched a low of $1.2858 on Dec. 29 as concern increased that the central bank may inject more currency into the financial system.

Currency Pairs

The shared currency tumbled 8.2 percent to 99.66 yen. It fell below 100 yen for the first time since 2001 yesterday. The dollar declined for a second year versus the Japanese currency, falling 5.2 percent to 76.91 yen. It traded at an average 79.71 yen per dollar in 2011, the weakest year since Bloomberg records began.

South Africa’s rand was the worst-performing major currency versus the dollar, falling 18 percent to 8.0900 per dollar as Europe’s debt crisis sapped demand for exports.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained 1.6 percent to 80.205, recording back- to-back annual gains for the first time since 2000-2001.

The dollar’s gains during the final two quarters of the year belied Standard & Poor’s stripping the U.S. of its AAA credit rating in August.

The U.S. currency’s portion of global foreign-exchange reserves rose to 61.7 percent in the period ended Sept. 30, the highest since the last three months of 2010. Reserves increased from 60.3 percent in the prior quarter, according to data from the International Monetary Fund. The share of euros fell to 25.7 percent, the lowest since July through September in 2008.

Dollar Standing

While S&P had used the dollar’s position as the world’s reserve currency to reaffirm its AAA rating in April, the company cited the weakening “effectiveness, stability and predictability of American policy-making and political institutions,” in its Aug. 5 downgrade of the U.S.

“The U.S. downgrade, people didn’t see that coming,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “You get the sense that people are thinking that 2012 could be a repeat of a lot of factors from 2011. Europe’s still going to have problems.”

Investors turned to the franc and the yen in a search for refuge, causing the nation’s two central banks to intervene to stem currency gains.

Japan’s currency gained against all 16 of its major counterparts tracked by Bloomberg. It was also the best performer of 10 developed-nation currencies, according to the Bloomberg Correlation-Weighted Indexes, adding 5.5 percent. The dollar rose 1.1 percent, and New Zealand’s dollar gained 0.5 percent.

Bank Buys

The Bank of Japan sold a record 9.09 trillion yen ($120 billion) from Oct. 28 to Nov. 28 in its third intervention in 2011 as the currency reached a post World War II-high of 75.35 per dollar on Oct. 31. On Aug. 4 it sold 4.5 trillion yen and on March 18 the Japanese officials appealed to the Group of Seven nations, who jointly intervened in the foreign-exchange markets for the first time in more than a decade after a deadly March 11 earthquake and tsunami.

The Treasury Department, in a semiannual report to Congress on the currency policies of major trading partners, criticized Japan on its unilateral interventions.

The franc fell 0.4 percent to 93.87 centimes per dollar, declining for the first time in six years. It rose 2.2 percent to 1.2159 per euro after reaching a record 1.0075 on Aug. 9, which led the Swiss National Bank to announce on Sept. 6 it would purchase “unlimited quantities” of foreign currencies to prevent the franc from strengthening beyond 1.20 per euro. The central bank has since defended that level.

Swiss Levels

“The rise in the Swiss franc was primarily driven on safe- haven demand, as there’s very little fundamentally that would support the franc at that level,” said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co. “The yen looks much less fundamentally overvalued.”

Investors exited higher-risk assets by unwinding so-called carry trades, which use borrowings in currencies of nations with low interest rates to buy assets in economies with higher yields, as volatility soared. The strategy lost 15 percent this year, the most since at least 1999, when records began, according to an index compiled by UBS AG.

Australia’s dollar rose 0.2 percent to $1.0209. It reached $1.1081 on July 27, the highest since the currency was freely floated in 1983 as the nation recovered from floods that shut mines and wiped out crops.

New Zealand’s dollar rose 0.4 percent to 77.72 U.S. cents. It reached a post 1985-float record of 88.43 U.S cents on Aug. 1 after the nation’s economy showed signs of recovery after a February earthquake.

Below Average

The euro was the worst performer according to the Bloomberg Correlation-Weighted Indexes, declining 2 percent as concern rising debt yields were unsustainable for European nations.

The ECB reversed the 50 basis point interest-rate increases this year and on Nov. 30 six central banks led by the Federal Reserve acted to make it cheaper for banks to borrow in dollars in emergencies.

“With Italy and Spain becoming embroiled in the crisis, it’s led to a pretty sharp reversal in terms of the policy stance of the ECB and clearly that’s been very relevant for the euro,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “We suspect that the ECB will continue with its very aggressive and easy monetary policy and liquidity policy stance and that’ll continue to weigh on the euro.”

Italian bonds handed investors lost 5.7 percent this year, according to indexes compiled by Bloomberg and European Federation of Financial Analysts Societies.

Canada Trades

Canada’s dollar traded stronger than parity with its U.S counterpart on average this year for the first time in more than three decades as investors sought assets of highly rated governments relatively isolated from euro-area debt woes. The loonie, as the currency is known, lost 2.3 percent to C$1.0213. It averaged 98.91 cents per U.S. dollar this year, the strongest annual value since 1976.

Hedge funds and other large speculators had 159,719 more aggregate bets the dollar will gain in the week ended Dec. 27, according to data from the Commodity Futures Trading Commission as compiled by Bloomberg. Futures traders added 14,182 wagers that the euro would fall against the greenback to a record 127,879 contracts.

--With assistance from Chris Fournier in Halifax, Nova Scotia. Editors: Paul Cox, Dennis Fitzgerald

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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