Bloomberg News

Euro Falls From Three-Week High Versus Yen on Euro-Bloc Threat

August 06, 2012

The euro fell from its strongest level in more than three weeks against the yen after Italy’s Prime Minister Mario Monti said divisions within the 17-nation currency bloc are threatening the European Union’s future.

The shared currency fluctuated against the dollar as a report showed investor confidence in the euro region dropped for a fifth month in August. The British pound declined against all of its 16 most-traded peers after U.K. data showed weakness in the housing market.

“We saw some improvement in risk sentiment late last week, but we’re still in a fragile environment,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said in a telephone interview. “The market is showing ongoing vulnerability to negative headlines.”

The euro was little changed at 97.14 yen at 11:29 a.m. New York time, after touching 97.80, the strongest level since July 12. It rose 0.3 percent to $1.2424, after dropping as much as 0.4 percent to $1.2342. The U.S. currency fell 0.4 percent to 78.19 yen.

Europe’s shared currency lost 1 percent in the past month versus nine developed-nation counterparts tracked by the Bloomberg Correlation-Weighted Indexes. The dollar was the worst performer, falling 2.2 percent, while Sweden’s krona rose the most, adding 2.9 percent.

Pound Drops

The pound fell to a one-month low against the euro after U.K. reports showing weakness in the housing market underlined the fragility of Britain’s economy. The currency dropped 0.4 percent to 79.49 pence per euro after depreciating to 79.63 pence, the weakest level since July 6. Sterling was little changed at $1.5635.

Australia’s dollar rose versus its U.S. counterpart after falling earlier. The Aussie gained 0.2 percent to $1.0589 after losing as much as 0.3 percent to $1.0537.

The Swedish krona dropped against most of its major peers as Statistics Sweden said service production fell 0.2 percent from May, when it gained 2.3 percent. Production rose an annual 1.1 percent, compared with May’s 1.9 percent jump.

The krona declined 0.2 percent weaker at 8.3260 against the euro and slipped 0.1 percent to 6.7004 per dollar.

‘Psychological Dissolution’

“The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe,” Monti told Germany’s Der Spiegel magazine in an interview published yesterday. He urged swift action to lower bond yields in the region’s peripheral nations.

Greater calm “would be good” in the debate over policy responses to the crisis, German deputy government spokesman Georg Streiter told reporters in Berlin today, when asked whether tensions in Europe were worsening.

European Central Bank President Mario Draghi outlined a plan last week under which the ECB may buy debt in tandem with the euro area’s bailout fund, while saying the details still need to be worked out over the coming weeks. Bundesbank President Jens Weidmann said in an interview published a day before Draghi’s comments that the ECB shouldn’t exceed its mandate.

Draghi’s plan is intended to lower yields on sovereign bonds for recession-stricken countries such as Spain, whose 10- year notes climbed to a euro-era high of 7.75 percent on July 25, the day before the ECB chief pledged to preserve the euro. The securities yielded 6.73 percent today.

Spanish Bonds

Any bond purchases undertaken by the ECB in unison with the European Financial Stability Facility would focus shorter-term securities, Draghi said on Aug. 2. The additional yield investors demand to hold Spanish 10-year bonds over two-year debt touched 3.43 percentage points today, the most since Bloomberg began collecting the data in 1993.

“There are probably considerations to see whether Spain requests official EFSF assistance,” Geoffrey Yu, a London-based currency analyst at UBS AG, said in a radio interview on “Bloomberg - The First Word” with Ken Prewitt. “If that happens, the market would probably welcome it, and it would be another step toward a structural solution for the euro zone.”

While Draghi’s pledge on July 26 that he would do “whatever it takes” to defend the euro succeeded in stemming a slide that pushed the 17-nation currency down about 6 percent since late March against its major counterparts, traders in the options market raised bets against the currency.

Put Premium

Three-month options show that the premium for puts, which grant the right to sell the euro versus the dollar, over calls, which confer the right to buy, increased to 1.62 percentage points at the end of last week from 0.85 percentage point on July 20. The gain is the biggest since the period through May 18, when Greece headed toward elections critical for its continued membership in the currency union.

Greece and its international creditors agreed on the need to strengthen policy efforts to support the economy and comply with its bailout terms after nearly two weeks of meetings in Athens. Representatives from the so-called troika of the European Commission, ECB and International Monetary Fund met with Greek Finance Minister Yannis Stournaras in Athens yesterday at the conclusion of the meetings.

“Many people in markets are resigned to the fact that Greece may need more assistance,” UBS’s Yu said. “There’s very little appetite across the euro zone, especially in the core, to provide Greece with any more money.”

An index measuring sentiment in euro bloc slid to minus 30.3, from minus 29.6 in July, Limburg, Germany-based Sentix said in a statement today.

Germany’s factory orders fell 7 percent in June from a year earlier, what would be the steepest drop since October 2009, according to economist estimates before the figure is released in Berlin tomorrow. Italy’s national statistics office will say industrial output declined in June by 6.5 percent from a year earlier, a separate Bloomberg survey of economists showed before the release, also scheduled for tomorrow.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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


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