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Euro Tumbles to Lowest in 16 Months Versus Dollar as S&P Downgrades France

Saturday, 14 January 2012 | 01:32
The euro dropped against most major counterparts, reaching a 16-month low versus the dollar, as Standard & Poor’s stripped France of its top credit rating.
The 17-nation currency fell for a sixth straight week against the greenback, its longest losing streak in almost two years, as S&P said on its website it lowered France’s rating one step to AA+ with a negative outlook. The euro fell to its weakest versus the yen since 2000 as talks between Greece and creditor banks were put on hold. The Dollar Index climbed as U.S. stocks fell after JPMorgan Chase & Co. said profit slid.
“The rumors of the pending cuts were enough to make the euro fall off and then take stocks with it,” said John Doyle, director of markets in Washington at the currency-trading firm Tempus Consulting Inc. “Greece has been a thorn in the side of the euro for almost three years now, and it will be a continuing weight on the euro.”
The euro weakened 1.1 percent to $1.2680 at 5 p.m. in New York. It touched $1.2624, the lowest level since Aug. 25, 2010, and lost 0.3 percent over the past five days. The last time the euro dropped for six weeks was the period ended Feb. 19, 2010.
The shared currency sank 0.8 percent to 97.57 yen and touched 97.20 yen, the weakest level since December 2000. It lost 0.3 percent for the week, its third five-day decline. The Japanese currency depreciated 0.3 percent to 76.97 per dollar.
While France was downgraded, S&P affirmed the ratings of Germany, Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands, the company said in a statement.
S&P Downgrades
Ratings of Cyprus, Italy, Portugal, and Spain were cut by two levels, S&P said. Austria, Malta, Slovakia and Slovenia were cut one step, it said.
The dollar climbed against most of its major counterparts as risk appetite faded and investors sought refuge.
“The three strongest net inflows being currently witnessed amongst global fixed-income markets are into Japanese government bonds, Swiss bonds and U.S. Treasuries,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, wrote to clients. “This flight to relative safe and liquid assets is being spurred by renewed concerns about potential credit rating downgrades in the euro zone.”
Yields (USGG10YR) on benchmark Treasury 10-year notes declined to 1.83 percent, the lowest level this year, as the securities’ prices rose. Japanese 10-year notes yielded 0.95 percent, the lowest since November, and Swiss 10-year yields were at 0.79 percent.
Dollar Index (DXY)
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, reached 81.784, the highest since Sept. 14, 2010, after JPMorgan said fourth-quarter profit decreased 23 percent. The S&P 500 Index dropped as much as 1.4 percent before paring losses to 0.5 percent.
Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro- area’s first sovereign default. Negotiations have “paused for reflection,” the Institute of International Finance said in an e-mailed statement today. The government said the two sides will reconvene discussions in five days.
“We’re focused on if there is going to be an agreement at all, regardless of the specifics,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut. “The ratings could have implications for the backstop mechanism, but we’re just focusing right now on Greece.”
Bets Against Euro
Futures traders increased bets to a record high that the euro will decline against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise -- so-called net shorts -- surged to 155,195 in the week ended Jan. 10, according to data from the Commodity Futures Trading Commission released yesterday.
France’s rating downgrade may threaten the potency of the region’s main bailout fund. The European Financial Stability Facility, which is funding rescue packages for Greece, Ireland and Portugal partially with bond sales, owes its AAA rating to guarantees from the euro region’s top-rated nations. A French downgrade may prompt investors to demand higher rates.
S&P put the ratings of 15 euro nations, including AAA rated Germany and France, on review Dec. 5 for possible downgrades. Moody’s Investors Service said Dec. 12 it would review European Union countries’ ratings after a Dec. 9 summit failed to produce “decisive policy measures” to end the debt crisis.
Italian Auction
The euro retreated 0.8 percent today against nine-developed nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes after Italian borrowing costs declined less at a note sale than when the country auctioned bills yesterday. The dollar gained 0.6 percent, while the Swedish krona was the biggest loser after the euro, declining 0.6 percent.
Italy sold notes due in November 2014 at an average yield of 4.83 percent, down from 5.62 percent at a prior auction on Dec. 29. Investors bid for 1.2 times the amount allotted, down from a bid-to-cover ratio of 1.36 last month.
The nation’s cost of borrowing for one year dropped to 2.735 percent at a bill sale yesterday, from a 5.952 percent yield at the prior auction on Dec. 12.
“That the bid-to-cover ratio was not especially high, combined with euphoric reactions to the bill auctions yesterday, left room for disappointment,” said Shahab Jalinoos, a senior currency strategist at UBS AG in Stamford, Connecticut. “The second issue is that the Greek private-sector-involvement story continues to rumble in the background.”

Source: Bloomberg
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