Bloomberg News

Euro Weakens as Fitch Adds to Debt Crisis Concern; Pound Drops

January 12, 2012

Jan. 11 (Bloomberg) -- The euro weakened for the first time in three days against the dollar and the yen as Fitch Ratings added to concern the region’s debt crisis will spread.

The euro slid versus 14 of its 16 most-traded counterparts after Fitch’s head of sovereign ratings, David Riley, said the European Central Bank should boost bond purchases to avert a collapse of the shared currency. The bank meets tomorrow. German data showed the region’s largest economy may be on the brink of recession.

“Risk is coming off a bit and is weighing on the euro,” said Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York. “Headlines from speakers and news from the ratings agencies are moving the market, but we’re looking on to tomorrow for the big event with the ECB.”

The euro dropped 0.5 percent to $1.2713 at 9:12 a.m. in New York after gaining 0.5 percent during the past two days. The 17- nation currency declined 0.4 percent to 97.83 yen. The dollar gained 0.1 percent to 76.95 yen.

Sterling was the worst performer against the dollar after data showed the U.K. trade deficit increased more than forecast and retail-store inflation slowed to the least in 16 months, fueling bets the Bank of England will need to add stimulus to aid the economy.

The pound dropped 0.7 percent to $1.5383 and depreciated 0.5 percent to 118.38 yen. It fell 0.1 percent to 82.63 pence per euro.

‘Cataclysmic’ Collapse

Italy faces a “significant chance” of a rating downgrade, Fitch said yesterday. The company is reviewing nations including Italy and Spain and will make a decision by the end of the month. Fitch’s action followed reviews announced by Standard & Poor’s and Moody’s Investors Service on euro-area nations.

“Fitch is suggesting a cataclysmic collapse of the euro unless the ECB ramps up bond buying,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. The comments are “weighing on the euro,” he said.

The ECB will keep its key interest rate at 1 percent at a policy meeting tomorrow, according to the median estimate of 53 economists surveyed by Bloomberg News. That would follow quarter-point rate reductions at each of the bank’s two meetings since Mario Draghi succeeded Jean-Claude Trichet as president in November. Six economists predict the central bank will lower rates to a record-low 0.75 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained 0.4 percent to 81.235 after rising to 81.503 on Jan. 9, the highest level since September 2010.

Taiwan’s Dollar

Taiwan’s dollar was the best performer against the U.S. currency on speculation President Ma Ying-jeou will be re- elected this weekend.

The currency rose to its strongest level in more than two months, gaining as much as 0.5 percent to NT$29.896 to the greenback before trading at NT$29.960. Overseas investors bought $318 million more local equities than they sold yesterday, the biggest net inflows since Dec. 1, according to exchange data.

The euro briefly pared its losses after German Chancellor Angela Merkel, after meeting today with Italian Prime Minister Mario Monti, said her nation may put more money into the permanent European bailout fund. Contributing more upfront capital to the fund would offer an “important message” to markets that European leaders are ready to resolve the crisis, she told reporters in Berlin.

‘More Capital’

“Germany is prepared -- if other partners are as well -- possibly to contribute more capital at the beginning of the launch” of the fund, Merkel said.

The euro has dropped 2 percent against the dollar this year amid concern policy makers will struggle to contain the region’s sovereign debt woes.

The German economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today, adding it may revise its assessment by the time official data are published on Feb. 15.

Industrial production in the euro region is forecast to have shrunk for a third month in November, according to a Bloomberg News survey before a report tomorrow by the European Union’s statistics office in Luxembourg.

“We see Europe deteriorating this year with the economy moving formally into recession,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-largest lender. “Over the next three months, the euro may drop to at least $1.20.”

--With assistance from Patrick Donahue in Berlin. Editors: Greg Storey, Dennis Fitzgerald

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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