http://www.businessweek.com/news/2012-07-22/euro-declines-to-11-year-low-versus-yen-before-spain-bill-sale

Bloomberg News

Euro Slides to Weakest Since 2000 Versus Yen on Crisis

July 23, 2012

Euro Declines to 11-Year Low Versus Yen as Europe Concern Mounts

The yen has climbed 8.8 percent over the past three months versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes, the best performance. The euro has slumped 5.1 percent, while the dollar has risen 4.1 percent. Photographer: Tomohiro Ohsumi/Bloomberg

The euro weakened to the lowest in more than 11 years against the yen as investors sought safer assets amid mounting concern that European leaders are failing to control the region’s debt crisis.

The 17-nation currency slid to its lowest in more than two years against the dollar, falling below its lifetime average. It extended losses versus the dollar and yen as Moody’s Investors Service cut to negative its outlooks on Germany, the Netherlands and Luxembourg. Six Spanish regions may seek aid from the central government, El Pais reported, spurring bets the nation’s finances will worsen and pushing Spain’s 10-year bond yield to a euro-era high.

“Spanish regions announcing they will be seeking aid clearly taxes an already-indebted Spanish government,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. “That makes the prospect of a broader bailout for Spain that much more inevitable.”

The euro fell 0.4 percent to $1.2113 at 5:37 p.m. in New York after losing as much as 0.7 percent to $1.2067, the weakest since June 2010 and below the average of $1.2087 since its inception in 1999. The shared currency fell to $1.1877 in June 2010, its lowest level since 2006. The euro dropped 0.5 percent to 94.93 yen and touched 94.24 yen, the lowest since November 2000. The yen rose 0.2 percent to 78.37 per dollar.

Moody’s Changes

The shared currency added to losses as Moody’s cited in a statement risks that Greece may leave the 17-nation euro currency and “increasing likelihood” of collective support for European countries such as Spain and Italy as reasons for the outlook changes.

“Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form,” Moody’s said in the statement.

Yields on German 10-year bonds rose to 1.18 percent today,

The euro pared losses earlier as safety demand eased and stocks trimmed declines. The Standard & Poor’s 500 Index (SPX) ended the day down 0.9 percent after tumbling earlier as much as 1.8 percent.

“As risk aversion moderates a little bit, you’re going to see pulling back in long yen positions,” Commonwealth’s Esiner said. “The yen bouncing off of its highs is another signal that the market sees a little bit of stabilization here.” Long positions are bets a currency will strengthen.

John Paulson, the billionaire hedge-fund manager, told clients he sees a 50 percent chance the euro will break up, according to an investor who listened to the comments on a conference call today. Paulson runs Paulson & Co. in New York. The investor asked not to be named because the call was private. Armel Leslie, a spokesman for the fund, declined to comment.

Worst Performer

The euro has slumped 5.4 percent this year, the worst performance, among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has fallen 0.2 percent, while the dollar has advanced 1.9 percent.

Spain and Italy moved to ban short-selling of stocks amid market turmoil. Spain’s stock-market regulator, the CNMV, said its ban would cover all equities for three months. Italy’s regulator, Consob, said its week-long ban was introduced on some banking and insurance shares. A short position is a bet a security will decline.

Officials of the European Commission, European Central Bank and International Monetary Fund, Greece’s troika of international creditors, arrive in Athens tomorrow amid doubts that the nation where Europe’s debt crisis began almost three years ago will meet its commitments for a bailout.

‘More Risk’

“There’s just more risk out there in the euro zone, and investors are getting more worried about how things could go,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “Concern is building that Spain will probably need a formal bailout.”

Catalonia, Castilla-La-Mancha, Murcia, the Canary Islands and the Balearic Islands are among the Spanish regions that have admitted they may ask for aid from the central government after Valencia sought a bailout last week, El Pais newspaper reported.

The yield on Spain’s 10-year bond jumped to as much as 7.565 percent, the highest since the euro was created.

Australia’s dollar tumbled on decreased risk appetite after reaching a record high against the euro. The Aussie gained as much as 0.4 percent to A$1.1671 before weakening 0.8 percent to A$1.1810. It depreciated 1.2 percent to $1.0259.

South Africa’s rand was the biggest loser among major currencies amid lower appetite for risk. It touched a three-week low versus the dollar, dropping as much as 2.4 percent to 8.4812 to the greenback before trading at 8.4595, down 2.1 percent.

Mexican Peso

The Mexican peso fell to its weakest level this month versus the dollar. It depreciated 1.7 percent to 13.5877.

Implied volatility on three-month options for Group-of- Seven currencies jumped to 9.28 percent, the highest level in more than a week, according to the JPMorgan G7 Volatility Index. It fell on July 20 to 8.32 percent, the lowest since 2007. The average over the past five years is 12.4 percent.

Increased volatility makes investments in currencies of nations with higher benchmark interest rates less attractive because the risk in such trades is that market moves will erase profits.

Key rates are 5 percent in South Africa and 3.5 percent in Australia, versus zero to 0.25 percent in the U.S. and 0.75 percent in the euro bloc.

Canadian Dollar

Canada’s dollar lost as much as 0.8 percent to C$1.0204 against its U.S. counterpart, the weakest level since July 12. The currency dropped as futures on crude oil, the nation’s biggest export, fell 3.7 percent a barrel to $88.07 a barrel in New York.

The greenback advanced against most major counterparts before a government report this week that’s forecast in a Bloomberg News survey to show U.S. gross domestic product, the value of all goods and services the nation produced, rose at a 1.4 percent annual rate in the second quarter. It gained at a 1.9 percent pace from January through March.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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