The euro fell the most in five months against the dollar as Moody’s Investors Service lowered credit ratings on 15 global banks, adding to concern Europe’s debt crisis is worsening.
The 17-nation currency weakened amid reports of possible downgrades and remained lower after the announcement late in the New York trading session. The yen weakened to its lowest level against the dollar in almost a month as U.S. two-year yields exceeded similar-maturity yields in Japan by a larger amount. The dollar strengthened a day after the Federal Reserve declined to increase asset purchases while extending its policy to lengthen maturities of existing debt holdings. New Zealand’s dollar and Mexico’s peso erased earlier gains.
“The news out of Europe remains pretty dour, despite the fact that we’ve had a bit of consolidation higher the last couple weeks,” Mike Moran, a currency strategist at Standard Chartered Bank, said in a telephone interview from New York. “That plays into a broadly risk-averse investor mindset, which has been helping the dollar.”
The euro depreciated 1.3 percent to $1.2540 at 5 p.m. in New York, reaching the biggest loss since Jan. 13. The yen weakened 0.9 percent to 80.28 per U.S. dollar and touched the weakest level since May 17. The 17-nation currency fell 0.4 percent to 100.69 yen.
Credit Suisse Group AG’s credit rating was cut three levels by Moody’s, Morgan Stanley was reduced two levels and 13 other banks were downgraded.
Credit Suisse, the second-largest Swiss bank, received the maximum reduction that Moody’s said in February it may make during a review of global banks with capital markets operations. Morgan Stanley and UBS AG, the other firms singled out for such a steep cut, were lowered two steps instead.
“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities,” Moody’s Global Banking Managing Director Greg Bauer said today in a statement.
“Because Morgan Stanley was only downgraded two notches, rather than three, we think equities and risk in general will take that positively,” Douglas Borthwick, managing director at Faros Trading LLC in Stamford, Connecticut, said in a telephone interview. “We expect a little bit of a retracement in the sell- off in risk today, which would mean a retracement higher in the euro and Australian dollar.”
The difference between yields on Japanese and U.S. two-year government securities has widened since June 4 and yesterday reached its highest level since April 5. U.S. two-year yields exceed Japan’s similar maturity debt by 20 basis points, or 0.2 percentage point.
“I attribute the dollar gains against the yen to cross- rate weakness in the yen and the wider interest-rate differentials between the U.S. and Japan in the two-year sector,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a telephone interview.
Japanese Finance Minister Jun Azumi pledged on June 1 to take “decisive action” to protect against “excessive moves” after the yen climbed to its highest level since February against the dollar. Japan has intervened to curb the yen’s 60 percent appreciation during the past decade. The currency surged to a post-World War II record of 75.35 per dollar in October before slipping 7.8 percent in the first quarter.
“Expectations for further monetary easing by the Bank of Japan (8301) are increasing,” Neil Jones, head of hedge-fund sales at Mizuho Corporate Bank in London, said in a telephone interview. “Markets expect the proposed consumption tax hike to pass through parliament by the end of the month. Tighter fiscal policy raises the chances of a looser monetary policy. On both counts, a currency should weaken, and the yen is no exception.”
New Zealand’s dollar erased an earlier gain against the dollar as Asian stocks declined and Chinese data added to signs global growth is slowing, damping investor appetite for higher- yielding assets.
The kiwi fell 1.2 percent to 78.64 U.S. cents, after earlier reaching 80.17 cents, the strongest level since May 4. This pullback should find support at 79.15 cents, and then in the area from 78.50 to 78.85 cents, Niall O’Connor, a technical analyst in New York at JPMorgan Chase & co., wrote in a report today.
Mexico’s peso dropped from a one-month high after the Federal Reserve Bank of Philadelphia’s general economic index fell to minus 16.6 in June, the lowest level since August, from minus 5.8 in the previous month. The currency depreciated 1.6 percent to 13.9241 per dollar. It touched 13.6316 yesterday, the strongest intraday level since May 15.
The euro-bloc manufacturing composite index held at 46, the same reading as in May, London-based Markit Economics said today in an initial estimate. That matches the lowest since June 2009. Economists had forecast a drop to 45.5, the median of 15 estimates in a Bloomberg News survey showed.
“The weak PMI data we’ve seen from Europe is weighing on the euro,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “The growth outlook is coming into question. There is plenty to put the euro back under pressure.”
The European Central Bank earlier this month held its benchmark interest rate at a record low of 1 percent, while President Mario Draghi said “a few” policy makers called for a cut. The central bank’s next rates decision is scheduled for July 5.
European finance ministers are set to meet in Luxembourg today to discuss the currency union’s financial woes.
The euro is down from this year’s high of $1.3487 on Feb. 24 and has depreciated about 6.6 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes that measure 10 developed-market currencies.
Barclays said in its global outlook published today that selling the euro is the most compelling trade in the foreign- exchange market. The company forecast that the currency will weaken to $1.15 in the coming year.
The dollar strengthened versus most of its major counterparts even after the Fed said yesterday it stood ready to implement further stimulus following the announcement of an extension to its program to replace short-term bonds with longer-term debt.
The central bank said it will expand its so-called Operation Twist program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank’s portfolio, by $267 billion through the end of the year. Officials also cut their estimates for 2012 growth after last month’s slowdown in hiring and said there will be little progress on unemployment during the rest of the year.
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, added 0.9 percent to 82.350, the strongest level since June 13.
“The slowdown in the U.S. economy is more than I have expected, and it’s damping people’s willingness to buy the dollar,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency-margin company.
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