Bloomberg News

Euro Falls for Third Day as Greece Struggles to Secure Debt Swap

February 01, 2012

Feb. 1 (Bloomberg) -- The euro fell for a third day against the dollar as Greece struggles to conclude debt-swap talks with creditors by the end of this week.

The 17-nation currency slid to a one-week low against the yen before Portugal sells bills today amid concern the nation will follow Greece in needing more aid to avoid default. The yen rose against all of its major peers even as Japanese Finance Minister Jun Azumi reiterated his stance today he will take “bold” steps to curb the currency’s strength if necessary.

“There are some concerns that talks may continue to drag on,” Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore, said about the Greek debt negotiations. “The longer it drags on, the more likely the crisis will continue to worsen. It’s a sell on rallies market” for the euro.

The euro fell 0.3 percent from yesterday to $1.3039 as of 7:25 a.m. in London, after touching $1.3026, the lowest since Jan. 25. The currency slipped 0.5 percent to 99.31 yen, after sliding to 99.29 yen, the weakest since Jan. 23. The dollar dipped 0.2 percent to 76.13 yen, the least since Oct. 31.

Greece’s Prime Minister Lucas Papademos said yesterday he wants to bring the negotiations on a debt-swap agreement with his country’s creditors “to a successful conclusion by the end of the week.” He said he would try to meet German-led demands for a bigger debt writedown by investors and deeper budget cuts by his government.

Portuguese Debt

Portugal will sell 105-day and 168-day bills today. Standard & Poor’s increased the number of Portuguese banks on “creditwatch negative” after it cut the sovereign rating of the country. Yields on Portugal’s two-year notes soared to a record 21.82 percent yesterday.

“There are concerns that Portugal may also need a second bailout,” said Forecast’s Lee, who expects the euro may fall below the Jan. 13 low of $1.2624, the weakest since August 2010. “If the economy slows even more, banks would come under more pressure,” he said.

The German government assumes the European Stability Mechanism, the region’s future permanent backstop, will have sufficient funds at its disposal, Finance Minister Wolfgang Schaeuble said in an interview on Deutschlandradio public radio. Greece must fulfill its obligations under its first aid program to qualify for aid from a second one, he said.

Europe’s crisis has increased demand for the yen, boosting it 7.1 percent over the past six months, the second-best performance after the dollar among the 10 currencies tracked by the Bloomberg Correlation-Weighted Indexes.

Goldman’s Prediction

Japan may act if the yen approaches a new record against the dollar during Asian trading hours, according to Naohiko Baba, Goldman Sachs Group Inc.’s chief economist in Tokyo. It could attempt large-scale intervention and continue so-called stealth operations for several days, he wrote in a note today.

The nation’s government refrained from selling yen in the market last month, the Ministry of Finance said yesterday on its website. Japan sold the currency on Oct. 31 when it climbed to a postwar record of 75.35 per dollar.

“The yen will continue to be bought,” said Kurt Magnus, executive director of currency sales in Sydney at Nomura Holdings Inc., Japan’s biggest brokerage. The lack of volatility means there isn’t any urgency for Japan to intervene, he said.

The implied volatility of three-month options on Group of Seven currencies was at 10.6 percent after touching 10.1 percent on Jan. 23, the lowest since March, according to the JPMorgan G7 Volatility Index. A drop makes investments in currencies with higher lending rates more attractive because the risk in such trades is that market moves will erase profits.

--With assistance from Kristine Aquino in Singapore. Editors: Naoto Hosoda, Rocky Swift

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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