Bloomberg News

Euro Falls for 2nd Week on Concern Greece May Exit Union

May 11, 2012

The euro weakened for a second week, touching a three-month low versus the dollar, as concern builds that Greece may be forced to withdraw from the currency union with the nation’s politicians unable to form a government.

The 17-nation currency dropped after Greek Pasok party leader Evangelos Venizelos failed to form a unity government and will hand back the three-day mandate to President Karolos Papoulias tomorrow. The dollar and yen rose against most of their 16 major peers after JPMorgan Chase & Co. said it made a surprise $2 billion trading loss, boosting demand for safer assets. Higher-yielding currencies, such as Australia’s dollar, dropped after China’s industrial production and retail sales rose less than forecast.

“The market is going to be looking to get its cues from how the sovereign-debt crisis evolves,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “If there’s a formation of a coalition government, what their rhetoric is, the possibility of an election -- as long as the market continues to ponder those things, the euro will remain on the soft side.”

The euro fell 0.2 percent to $1.2917 at 5 p.m. New York time after touching $1.2905, the weakest level since Jan. 23. It dropped 1.3 percent this week. The shared currency declined 0.1 percent to 103.26 yen after dropping as much as 0.4 percent. The dollar was unchanged at 79.93 yen.

The yen pared earlier gains against some of its major counterparts after a gauge of U.S. consumer confidence topped economists’ estimates, renewing appetite for some higher- yielding assets.

Consumer Sentiment

Norway’s krone rose 0.2 percent against the yen after earlier dropping by as much as 0.6 percent. Brazil’s real fell 0.7 percent against the dollar after earlier appreciating by as much.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for May rose to 77.8 from 76.4 the prior month. It was projected to drop to 76, according to a Bloomberg News survey.

Greece’s political impasse following an inconclusive May 6 election has raised the possibility that another ballot will have to be held as early as next month, threatening the implementation of austerity pledges. The standoff has reignited European concerns over Greece’s ability to hold to the terms of its two bailouts negotiated since May 2010 and stoked speculation it will have to leave the currency union.

Euro Membership

Talks will continue under the guidance of Papoulias, Venizelos said, and Greeks made it clear in elections that they want a coalition government that will secure the country’s place in the euro.

“There’s still a huge amount of uncertainty in the euro region, and Greece remains closer to an exit than it has ever been,” said Jane Foley, a senior currency strategist at Rabobank International in London.

Gross domestic product in the euro area will drop 0.3 percent this year, the European Commission said, reiterating a February forecast. Greece will have the deepest contraction, with GDP shrinking 4.7 percent, while the economies of Spain and Italy are seen falling 1.8 percent and 1.4 percent, respectively.

The euro rose against the pound as Italy sold 10 billion euros of Treasury bills, meeting its target for the auction as rates fell from the previous sale. The Rome-based Treasury sold 7 billion euros of 364-day bills at 2.34 percent, down from 2.84 percent at the last sale of similar-maturity debt on April 11. The euro strengthened 0.3 percent to 80.39 pence, its first gain in six days.

Pound Declines

The pound fell against the dollar, extending a second weekly decline, after an industry report showed U.K. consumer confidence dropped last month as the economy slipped into a double-dip recession.

Sterling weakened versus most of its major peers as signs economic outlook is worsening raised the prospect that Governor Mervyn King will hint at resuming bond purchases, or quantitative easing, when the central bank releases its Inflation Report next week.

The pound dropped 0.5 percent to $1.6069, losing 0.5 percent this week.

Australia’s dollar, known as the Aussie, slid against most of its major counterparts on concern a slowdown in China’s economy will reduce demand for commodity exports.

Aussie, Loonie

China’s industrial production rose 9.3 percent in April from a year earlier, the National Bureau of Statistics said today, compared with the 12.2 percent gain projected by economists. Retail sales increased 14.1 percent last month, while economists had forecast a 15.1 percent increase. China is Australia’s biggest trading partner.

The Aussie dropped 0.6 percent to $1.0020.

Canada’s dollar advanced against its U.S. counterpart after a report showed employment rose by 58,000 in April following a March jump of 82,300 that was the biggest since September 2008. The labor force grew by 72,500, lifting the jobless rate to 7.3 percent from 7.2 percent. The two-month gain in employment was the biggest in more than 30 years.

The loonie, as the currency is nicknamed, advanced 0.2 percent to C$1.0005 per U.S. dollar.

Canada’s dollar has gained 3.9 percent in the past six months, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro declined 4.1 percent, the biggest drop.

“This is a case of caution, particularly amongst the existing euro shorts, into a weekend where we still have no resolution where the next Greek government is concerned,” Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York, said of bets for the currency to decline.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

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


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