Euro falls to 6-month low on debt crisis; dollar rises
The euro declined to a six-month low against the dollar on speculation the European Central Bank will cut interest rates amid record Greek bond yields and the region’s deepening debt crisis.
The Dollar Index headed for the biggest weekly gain since August 2010 after President Barack Obama detailed his $447 billion plan to boost hiring. The 17-nation euro weakened amid speculation the region’s central bank will dilute a proposal to wean distressed banks off its emergency funding, said a euro- area official familiar with the deliberations. South Africa’s rand tumbled to an almost one-month low against the greenback as global stock markets tumbled and Greek yields rose to records.
“The latest ECB headline feeds into the prevailing trend, which is to sell the euro,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. “The markets reacted favorably to Obama’s plan and that’s part of the dollar’s bid.”
The euro depreciated 1.2 percent to $1.3719 at 10:55 a.m. in New York, after dropping to $1.3699, the lowest level since Feb. 28. The currency has slumped 3.4 percent this week, the most since the period ended May 6. The euro slipped 0.9 percent to 106.66 yen. The dollar gained 0.3 percent to 77.73 yen.
Dollar Rallies
The Dollar Index, which tracks the greenback versus the currencies of six U.S. trading partners, gained for a second day, adding 0.9 percent to 76.931. It earlier reached 77.052, the highest level since March 11. The gauge headed for a 2.9 percent weekly gain, the most since the period ended Aug. 13, 2010.
“The story is simply that the dollar is picking up a bit because there are very few places where you can run and hide,” said Sebastien Galy, a senior currency strategist at Societe Generale SA in London. “You’re not getting any yield in Europe. It does suggest more dollar demand.”
Axel Merk, president and chief investment officer at Merk Investments LLC, said his firm sold $90 million of euros yesterday after European Central Bank President Jean-Claude Trichet took a “more dovish tone.”
Merk Investments manages more than $700 million in assets and runs the Merk Hard Currency Fund. Merk disclosed the sale in a note today.
ECB View
The ECB left its benchmark rate at 1.5 percent yesterday and cut its 2011 and 2012 growth forecasts at a policy meeting in Frankfurt. Greek bond yields reached record highs as the country endeavors to show it can reach budget-cutting targets to receive financial aid.
The nation is seeking preliminary responses today from bond investors to the proposed debt swap, part of a 159 billion euro ($218 billion) European Union rescue plan agreed upon in July.
The implied yield on Euribor futures for June slid four basis points to 0.98 percent, showing traders were adding to wagers for lower borrowing costs. Investors should be “on alert” for a potential 50 basis-point cut in ECB rates, Barclays Plc economists Julian Callow and Francois Cabau wrote in an investor report yesterday.
The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, fell 7.1 basis points to 66.3 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback, according to data compiled by Bloomberg.
Down Move
“The catalyst has been the dovish stance from the ECB yesterday, which has continued to reinforce the downward move in the euro across the board as yield spreads are starting to move against it,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubihsi UFJ Ltd. in London. “Given the ongoing problems in the euro zone debt markets, there’s not much to like about the euro.”
The euro headed for a weekly decline of 0.9 percent against nine developed nation currencies, according to the Bloomberg Correlation-Weighted Indexes. The Swiss franc declined 9.2 percent this week and the New Zealand dollar fell 0.3 percent.
The cost of insuring against default on European financial and sovereign debt rose to records amid speculation bailout funding to Greece may be withheld. Ilias Mosialos, a Greek government spokesman, said the payment of a sixth loan tranche under a European Union and International Monetary Fund bailout agreed in May of last year isn’t at risk.
“Whenever there are things like ‘Greece is not doing enough’ is said, that is when people get the most scared because of a possibility they may not get the next tranche of aid,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Periphery concern has continued to be the overarching theme.”
Loan Plan
Instead of imposing higher interest rates on emergency loans to penalize Greek, Irish and Portuguese banks, the ECB and national central banks would ask financial institutions to detail how they will repay the money, the euro-area official said.
The seven-day relative strength index for the gauge reached 78.16, trading above the 70 level for the second day. A reading above 70 signals an asset may have risen too quickly and may be due for a reversal. The euro’s seven-day relative strength fell below 30 for the second day signaling it may have declined too fast and may reverse.
South Africa’s rand was the biggest loser against the dollar, falling as much as 1.7 percent to 7.2985, the weakest since Aug. 11, before trading at 7.2709. The Standard & Poor’s 500 Index declined 1.2 percent and the S&P GSCI Index of raw materials slumped 1.7 percent.
Demand for the yen was tempered before finance ministers from the Group of Seven nations meet today in Marseille, France, to discuss ways to bolster their economies. Japanese Finance Minister Jun Azumi said before departing from Tokyo that he would appeal to the group to appreciate his concern about excessive yen gains.
Japan has intervened in the currency markets three times in the past 12 months to weaken the yen, with the last operation being a 4.51 trillion-yen action in August, the largest monthly amount since March 2004. The yen went on to reach 75.95 per dollar on Aug. 19, a postwar record.