Bloomberg News

Euro Reaches Four-Month Low Amid Greek Government Concern

May 16, 2012

The euro traded 0.1 percent from the lowest level in almost four months. Photographer: Simon Dawson/Bloomberg

The euro traded 0.1 percent from the lowest level in almost four months. Photographer: Simon Dawson/Bloomberg

The Dollar Index rose, extending its longest run of gains on record, as Greek leaders prepared to hold new elections amid mounting concern the nation will exit the currency bloc.

The euro reached a four-month low against the greenback as Greece’s central bank head said Greeks have been pulling cash from the nation’s lenders following an inconclusive May 6 vote. The pound fell the most in a month against the dollar as the Bank of England said U.K. growth will stay “subdued” in the near term. The Federal Reserve releases minutes of its April policy meeting today.

“As the week progresses, the risk that there is a Greek exit, along with all the baggage that goes along with it, continues to be very real,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “This is a continuation of the euro move for justified reasons.”

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to gauge the greenback against the currencies of six U.S. trading partners, rose 0.1 percent to 81.267 at 9:06 a.m. New York time, strengthening for a 13th day in the longest string of gains since its inception in 1973.

The euro rose 0.1 percent to $1.2744 after dropping to $1.2681, the weakest level since Jan. 17. The shared currency rose 0.5 percent to 102.56 yen after sliding to 101.91, the lowest since Feb. 14. The dollar advanced 0.4 percent to 80.50 yen.

Caretaker Government

The implied volatility of three-month options on Group of Seven nations’ currencies rose to as high as 10.94 percent, the highest since Jan. 9, according to a JPMorgan Chase & Co. index. The measure has averaged 11.6 percent over the past year. Greater volatility makes investments in currencies with higher benchmark lending rates less attractive because the risk in such trades is that market moves will erase profits.

Greece’s Democratic Left leader Fotis Kouvelis said a new caretaker government decided by party leaders today would have one task, that of holding elections. He said elections would most likely be held on June 17. President Karolos Papoulias failed to broker a governing coalition in meetings yesterday.

The deadlock in Greece has sparked uncertainty over the country’s pledged spending cuts required by the terms of its two bailouts worth 240 billion euros ($306 billion) negotiated since May 2010.

‘Big Winner’

“Risk aversion is rife and the dollar is the big winner,” Lauren Rosborough, a senior foreign-exchange strategist at Societe Generale SA in London, wrote in a note to clients. “It would be as foolish to downplay the dangers of a Greek exit.”

The premium for three-month options granting the right to sell the euro against the dollar relative to those allowing for purchases rose above 3 percentage points for the first time since December, the 25-delta risk reversal rate show. The premium was 1.97 percentage points at the end of April.

The euro has lost 1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 1.1 percent over the period.

“Risk-off has done a lot of damage to the euro,” said Gavin Stacey, chief interest-rate strategist at Barclays Capital in Sydney. “If we are to see Greece leave the euro, I suspect the initial reaction will be even more catastrophic.”

The dollar strengthened earlier against most of its major peers before the Fed releases minutes of its April 24-25 meeting.

Awaiting the Fed

Chairman Ben S. Bernanke said after that gathering he’s prepared to “do more” to boost the recovery and ensure inflation remains close to target. Officials have said borrowing costs are likely to remain “exceptionally low” at least through late 2014.

The Fed bought $2.3 trillion of bonds in two rounds of quantitative easing, or QE, from December 2008 to June 2011. The central bank is also replacing $400 billion of short-term Treasuries in its holdings with longer-term debt to keep borrowing costs down.

“The markets are awaiting the minutes and any Fed speech to get a sense of whether or not another round of QE is in the pipeline,” Barclays’ Stacey said. “The U.S. dollar would weaken on the back of further QE and by improvement in risk appetite.”

The pound weakened for a second day against the dollar after central bank Governor Mervyn King said the U.K. faced threats from the euro region’s “storm” as he released the quarterly Inflation Report in London.

‘Euro-Zone Fallout’

The central bank this month halted its bond-purchase, or quantitative easing, program at 325 billion pounds ($519 billion).

“The pound is lower given King’s concerns over the euro- zone fallout and the possible negative impact on the U.K. economy,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There were certainly no signs of further QE being off the table.”

The pound fell 0.4 percent to $1.5937 after dropping as much as 0.7 percent, the biggest decline since April 13. Sterling slid 0.3 percent to 79.84 pence per euro.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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


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