Bloomberg News

Euro Falls Most in 14 Months as Cyprus Adds Debt Concern

March 18, 2013

Europe Risks Debt-Crisis Contagion From Cyprus Deposit Levy

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said on Twitter that the concern in Cyprus “moves risk-on trade to backseat.” He added: “Sell euro as well.” Photographer: Kiyoshi Ota/Bloomberg

The euro slid the most in 14 months against the dollar after a proposed levy on bank deposits in Cyprus threatened to worsen the European debt crisis.

The 17-nation currency fell to a two-week low versus the yen as the nation postponed a vote on meeting demands by regional finance ministers to raise 5.8 billion euros ($7.5 billion) by imposing losses on its depositors. The euro pared its drop as declines in Italian and Spanish government bonds were limited.

“In the case of Cyprus, there is concern about the unknown and potential contagion risks to other indebted countries in the euro area,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by telephone from Washington, D.C. “Investor response has been to sell the euro first and ask questions later.”

The euro slid 0.9 percent to $1.2957 at 5 p.m. in New York, after dropping as much as 1.5 percent, the biggest decline since Jan. 13, 2012. The common currency slumped 1 percent to 123.36 yen after falling to 121.15, the weakest level since March 5. Japan’s currency gained 0.1 percent to 95.21 per dollar.

Trading Fluctuations

One-week implied volatility on the euro-dollar exchange rate rose as much as 34 percent, the biggest single-day increase since May 2010. The gauge climbed to 11.23 percent before trading at 9.65 percent.

The premium for one-month options granting the right to sell the euro against the dollar relative to those allowing for purchases increased to 1.12 percentage points from 0.96 on March 15, the 25-delta risk reversal shows.

The shared currency bounced off a critical support zone from $1.2865 to $1.2890, which includes the 200-day moving average, Cilline Bain, a London-based technical analyst at Credit Suisse Group AG, wrote today in a note to clients. The euro may increase to $1.3319, which would be its strongest level since Feb. 25, he said.

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the currency bloc since the European Central Bank’s pledge in September to backstop troubled nations’ debt. The terms of Cyprus’s bailout are negative for depositors across Europe, and may hurt bank ratings region-wide, Moody’s Investors Service said in a Credit Outlook report today.

‘Dangerous Precedent’

“There’s concerns about the dangerous precedent that this sets in terms of other so-called depositors guarantees,” said Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore. “It’s the defacto break-up of the euro in the fact that having money in a Cyprus bank isn’t worth as much as having money in any other bank.”

The euro trimmed declines as the impact of developments in Cyprus had relatively limited impact on short-maturity Italian and Spanish bonds, said Arne Rasmussen, head of currency research at Danske Bank A/S (DANSKE) in Copenhagen.

Italy’s 10-year bond yield increased four basis points to 4.63 percent after rising as much as 21 basis points. Spain’s 10-year yields climbed four basis points to 4.96 percent.

“The issue is whether to believe that the Cyprus levy on depositors is one-off, but depositors and investors elsewhere could easily see this as another in a string of ‘one-offs’ and react badly,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in a note to clients. The euro will be sold against a range of currencies including the dollar, Swiss franc and pound, he wrote.

The 17-nation euro tumbled 0.9 percent to 85.77 pence and dropped 0.1 percent to 1.2257 francs.

Market Measure

The euro has weakened 1.4 percent during the past month, the second worst performer after Norway’s krone of 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It has still strengthened 2.4 percent in the previous six months.

The JPMorgan Chase & Co. G7 Volatility Index (JPMVXYG7), based on three-month options on Group of Seven nations’ currencies, reached 9.7 percent, the highest level since March 4.

Mexico’s peso gained versus most of its major peers after Deputy Finance Minister Fernando Aportela said the country isn’t planning measures to curb the currency’s advance in the wake of the central bank’s first benchmark rate cut since 2009. It gained 0.2 percent to 12.4151 per dollar, after gaining as much as 0.3 percent.

The Hungarian forint fell to a 14 month-low against the euro as concern Europe’s debt crisis will escalate added to the turmoil caused by the government’s plan to cut borrowing costs. The forint slid 1.9 percent last week as Prime Minister Viktor Orban called for lower interest rates and for measures to help foreign-currency borrowers.

The currency dropped 0.3 percent to 306.28 per euro after sliding to the weakest level since Jan. 18, 2012.

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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