Bloomberg News

Euro Drops Versus Dollar, Yen on Greece Crisis Contagion Concern

May 19, 2012

The euro lost 1.1 percent to $1.2780, falling to $1.2642, the weakest since Jan. 16. It has dropped 3.5 percent so far this month. Photographer: Hannelore Foerster/Bloomberg

The euro lost 1.1 percent to $1.2780, falling to $1.2642, the weakest since Jan. 16. It has dropped 3.5 percent so far this month. Photographer: Hannelore Foerster/Bloomberg

The euro fell for a third week against the dollar, reaching a four-month low, after the failure of Greek leaders to form a government increased concern the debt crisis may spread to other nations in the monetary union.

The 17-nation currency dropped for a fourth week against the yen as investors await a June 17 election in Greece and amid a Group of Eight nations’ leaders meeting that began yesterday. Higher-yielding currencies, including Brazil’s real, slumped as increased concern about the euro crisis damped demand for risk. The yen rose to a three-month high against the greenback before a Bank of Japan meeting May 23.

“Given the recent past for Greece, investors are going to remain skeptical ahead of that mid-June election,” said Joe Manimbo, a market analyst in Washington at Western Union Co.’s Western Union Business Solutions unit. “We could see continued political discord in Greece, something that would only increase worries about the debt crisis and likely keep borrowing costs for nations like Spain and Italy elevated.”

The euro lost 1.1 percent to $1.2780, falling to $1.2642, the weakest since Jan. 16. It has dropped 3.5 percent so far this month. The shared currency weakened 2.2 percent to 100.98 yen, the most since the period ended April 6. The Japanese currency appreciated 1.2 to 79.02 per dollar and touched 79.00, the strongest since Feb. 17.

Brazil’s real was among the worst-performing major currencies as the central bank auctioned currency swaps for the first time since March. It weakened 2.8 percent against the dollar to 2.0238, the first time it traded above 2 since 2009.

Greece Downgrade

Fitch Ratings lowered Greece’s credit rating to CCC from B- on May 17, saying the strong showing of “anti-austerity” parties in elections on May 6 and subsequent failure to form a government underscored the lack of public and political support for the country’s bailout from the European Union and International Monetary Fund.

A caretaker government was appointed this week after President Karolos Papoulias failed to broker a governing coalition among the major parties that won the elections earlier this month. The deadlock in Greece has sparked uncertainty over the country’s spending cuts required by the terms of its two bailouts worth 240 billion euros ($307 billion) negotiated since May 2010.

An opinion poll yesterday showed the New Democracy party ahead of Syriza, the main party opposed to implementing terms of the international rescue. Pasok came in third place.

‘So Much Oversold’

“Greece still weighs on risk foreign exchange,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “We’ve come to a point where it is so much oversold that even a morsel of good news could pop it higher. The euro is vulnerable to a rally.”

Hedge funds and other large speculators increased their bets on a weaker euro to 173,869 in the week ended May 15, the highest since the common currency’s inception in 1999, according to Commodity Futures Trading Commission data.

German Chancellor Angela Merkel and fellow European leaders will face pressure from their G-8 counterparts to do more to quell the turmoil after speculation Greece will exit the euro wiped almost $4 trillion from global stock markets this month.

The European Central Bank said it will temporarily stop lending to some Greek banks, with President Mario Draghi indicating it won’t compromise to keep Greece in the euro area. Draghi acknowledged for the first time this week that Greece may exit. While the bank’s “strong preference” is that Greece stays in the bloc, the will continue to preserve “the integrity of our balance ECB sheet,” he said in a speech.

Sterling, Loonie

Gross domestic product in the nations of the monetary union stagnated in the first quarter compared with the prior three months, the European Union’s statistics office said. The median forecast of economists surveyed by Bloomberg was for a 0.2 percent decline.

The pound fell against the euro, after earlier touching 79.51 pence, the strongest since November 2008, as the Bank of England said U.K. growth will stay “subdued” in the near term. 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.

Sterling fell 0.5 percent to 80.78 pence per euro and lost 1.6 percent to $1.5817.

Canada’s dollar and Mexico’s peso fell against the dollar after the weaker-than-expected U.S. data diminished investor appetite for risk. The U.S. is Canada’s and Mexico’s largest trade partner.

The loonie, as Canada’s dollar is known, fell 2.1 percent to C$1.0222 against the greenback and the peso lost 1.8 percent to 13.8158 per dollar.

Fed’s View

The Federal Reserve Bank of Philadelphia’s general economic index decreased to minus 5.8 in May from 8.5. Economists forecast the gauge would rise to 10, according to the median estimate in a Bloomberg News survey. Another central bank survey showed that manufacturing in the New York region accelerated more than forecast, rising to 17.1 this month from 6.6 in April.

Several Fed policy makers said a loss of momentum in growth may warrant more stimulus to keep the recovery on track, according to minutes of the Federal Open Market Committee’s April 24-25 meeting released May 16 in Washington. Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years.

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 1 percent to 81.089. It gained for 14 straight days through May 17, the longest winning streak since its inception in 1973.

‘Long Yen Exposure’

The implied volatility of three-month options on Group of Seven nations’ currencies rose to as high as 11.59 percent, the highest since Jan. 6, 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.

Japan’s Finance Minister Jun Azumi said May 17 Japan will take appropriate steps if needed in the foreign-exchange market. The BOJ, which sold yen in the currency market as recently as November, will meet May 23. The central bank intervened in the market after the yen surged to a post-World War II record of 75.35 per dollar in October.

The BOJ this week failed to find enough government securities to buy as part of its stimulus program. The shortfall increased concern it may have to broaden its asset-purchase program to encompass longer-dated debt or other types of assets.

“The market is slowly, almost reluctantly, being forced to build some long yen exposure,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York.

Futures traders decreased the number of short yen positions to 34,315 from 41,093.

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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