Euro slides on renewed Greek default concern; dollar, yen gain

The euro weakened for a third day against the dollar, extending yesterday's 2 percent slump, as renewed concern Greece will default and the European Central Bank will cut interest rates damped demand for the currency.

The 17-nation euro fell the most in two weeks versus the yen after Greek Prime Minister George Papandreou pledged to put the European Union's latest accord to a referendum, risking pushing the country into default if rejected by voters. The dollar and yen strengthened as stocks slid around the world and a Chinese report showed manufacturing slowed. Australia's dollar declined after the nation's central bank cut interest rates.

“European fears and risk aversion are trumping everything and gives euro bears the confidence to have another go at the shared currency,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “What the Greeks are considering doing would result in about as disorderly a default as you can get. That threatens to return Europe to the maelstrom” and boosts the chance of an rate cut from the ECB.

The euro dropped 1.1 percent to $1.3710 at 7:14 a.m. in New York after falling to $1.3672, the weakest since Oct. 20. The shared currency depreciated 1.1 percent to 107.17 yen, after sliding as much as 1.4 percent, the biggest drop since Oct. 17. The dollar was little changed at 78.18 yen after rising to 79.53 yesterday, the strongest since Aug. 4.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, gained for a third day, rising 1 percent to 77.233.

Greece Referendum

Papandreou's call for a referendum and a parliamentary confidence vote raised the prospect of derailing the European bailout effort and pushing Greece into default. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative. Group of 20 leaders gather for a Nov. 3-4 summit in Cannes, France, to discuss the debt crisis.

The Stoxx Europe 600 Index of shares declined 3.2 percent and Standard & Poor's 500 Index futures expiring in December dropped 1.9 percent.

“It certainly is a worry just how weak the European economy is,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation's biggest lender. A European interest-rate cut “may happen next year. In the short term, you could certainly see euro falling further towards the $1.35 region.”

The ECB next meets to review borrowing costs on Nov. 3. The central bank will cut its benchmark rate by 35 basis points over the next 12 months, according to a Credit Suisse AG index based on swaps.

China Manufacturing

The dollar advanced versus all 16 of its major counterparts after the China Federation of Logistics and Purchasing said its Purchasing Managers' Index fell to 50.4 in October, from 51.2 the previous month. That compared with the median estimate of 51.8 in a Bloomberg survey of economists.

The greenback has appreciated 5.6 percent in the past six months according to Bloomberg Correlation-Weighted Indexes, which track the currencies of 10 developed nations. The yen has gained 8.3 percent and the euro has weakened 2.7 percent.

“Risk aversion will prevail over the next few months and that should benefit the U.S. dollar,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia's second-largest lender. “If investors want to now buy a major currency during a risk-averse period, there's only one left and that's the U.S. dollar.”

Australian Dollar

The so-called Aussie slid against all its major peers after the Reserve Bank of Australia lowered its cash rate target by 25 basis points to 4.5 percent. That's the first cut since April 2009. Sixteen of 27 economists surveyed by Bloomberg News predicted the move. The rest forecast no change.

“The Aussie is lower after the RBA rate cut,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “It seems like they have opened the door for more rate cuts because they say that inflation is likely to be close to target. I think there's a possibility there may be another cut in December.”

The Australian dollar slid 1.9 percent to $1.0326, and dropped 2 percent to 80.70 yen.

The yen maintained losses from yesterday against the dollar, which occurred after Japan sold its currency to weaken it and protect exporters. Finance Minister Jun Azumi said in Tokyo today the government will continue to take appropriate action on the currency.

Credit Suisse Group AG analysts estimated the value of yesterday's market operations may have exceeded $50 billion. The intervention was the first since August, when Japan spent 4.51 trillion yen seeking to stem the currency's surge to a postwar high against the dollar.