Bloomberg News

Euro Falls to 3-Month Low Against Dollar on Greek Debt Concern

May 12, 2012

The euro fell against the dollar for a second week, reaching a three-month low, as concern mounted that politicians in Greece won’t be able to form a coalition government and the nation may exit the monetary union.

The 17-nation currency slumped after an inconclusive May 6 election and the subsequent struggle by leaders to form a government. The dollar gained against all its major peers, and the yen rose versus all but the greenback, amid increased demand for havens. The Federal Reserve on May 16 will release minutes from its April 25 meeting.

“The main theme we’ve seen throughout the week is the risk-off trade,” said Joe Manimbo, a market analyst in Washington at Western Union Co. (WU:US) unit Western Union Business Solutions. “Whether it’s concerns about the outlook for the Greek political impasse or Europe steadily marching toward recession, investors have moved toward safer assets.”

The euro fell 1.3 percent on the week to $1.2917 and reached $1.2905, the weakest level since Jan. 23. It declined 1.2 percent to 103.26 yen. The dollar rose 0.1 percent to 79.93 yen.

South Africa’s rand and Mexico’s peso were the biggest losers among the 16 major currencies tracked by Bloomberg. The rand fell 3.3 percent to 8.0970 per dollar and the peso weakened 3 percent against the greenback to 13.5745.

Elections in France and Greece on May 6 left uncertainty about the future of austerity measures in the nations.

‘Case of Caution’

France’s Francois Hollande, who will become the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for less austerity and more growth in the region. Hollande’s platform calls for policies German Chancellor Angela Merkel opposes, including increased spending and delayed deficit cuts.

Greek elections left the two biggest parties short of the clear majority to keep bailout efforts on track, and raised the possibility that another election will have to be held as early as next month, threatening the implementation of austerity pledges. The standoff has reignited European concern 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.

Greek Pasok party leader Evangelos Venizelos failed to form a unity government yesterday when Alexis Tsipras, the leader of Greece’s biggest anti-bailout party Syriza, turned down an appeal by political leaders to join the coalition. Venizelos will hand back the three-day mandate to President Karolos Papoulias today.

“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.

Bank of England

The European Financial Stability Facility’s board of directors confirmed the release of 5.2 billion euros ($6.7 billion) from a first installment of 39.4 billion euros by the end of June, the EFSF said in an e-mailed statement this week.

The British pound rose against the euro after the Bank of England’s Monetary Policy Committee held its quantitative easing target at 325 billion pounds ($522 billion), ending a second round of stimulus.

The decision was forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left their benchmark interest rate at a record low of 0.5 percent.

The pound gained 0.8 percent to 80.39 pence per euro. It lost 0.5 percent to $1.6069.

‘Room to Move’

Australia’s dollar weakened for a second week as concern increased the central bank will further lower interest rates and as reports showed a slowdown in China’s economy. It declined versus its U.S. counterpart after Prime Minister Julia Gillard on May 9 said returning the budget to surplus will give the central bank “maximum room to move” in setting interest rates. The Reserve Bank of Australia cut interest rates by 0.5 percent to 3.75 percent May 1.

The Aussie dropped 1.6 percent to $1.0020 and reached $1.0018, the lowest level since December.

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

Loonie Gains

Canada’s dollar advanced against most of its major counterparts 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 Canadian economy is doing pretty good and the contrast is stark between Canada and Europe,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “North America in general is doing OK but, in contrast to the euro zone, that’s the one that really stands out.”

The loonie, as the currency is nicknamed, rose 0.9 percent to C$1.2925 per euro. It fell 0.4 percent to C$1.0005 against the greenback.

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.

Fed Minutes

The Thomson Reuters/University of Michigan preliminary index of U.S. 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.

The Fed will release the minutes from its April 25 meeting on May 16. Chairman Ben S. Bernanke said after the meeting that he’s prepared to “do more” to boost the economic recovery and ensure that inflation remains close to target.

Fed policy makers upgraded their forecasts for growth and unemployment this year in a statement following the meeting. They repeated their view that borrowing costs are likely to remain “exceptionally low” at least through late 2014.

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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