Euro Declines to Three-Week Low on Greece Debt Concern; Dollar Strengthens
Thursday, 16 February 2012 | 12:35
The euro declined to a three-week low against the dollar as European leaders struggled to reach agreement over a rescue for Greece, sapping demand for the region’s assets.
The 17-nation currency fell for a fifth day versus the greenback after Luxembourg Prime Minister Jean-Claude Juncker said Europe’s creditor countries are seeking more control over how aid to Greece is spent as the nation heads toward a possible default next month. The dollar strengthened after Moody’s Investors Service said it’s reviewing major banks for possible downgrades. Sweden’s krona dropped to a two-week low after the central bank cut interest rates.
“The Greek situation will weigh on the euro,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “There seems to be doubt among major economies about Greece’s ability and commitment in implementing the austerity program. The fact that short euro positions had recently been lightened up makes the currency vulnerable to a sell off.” A short position is a bet an asset will fall.
The euro declined 0.5 percent to $1.3001 at 6:11 a.m. in New York after sliding to $1.2983, the lowest level since Jan. 25. The common currency was little changed at 102.45 yen after falling 0.5 percent yesterday. The dollar appreciated 0.5 percent to 78.80 yen.
Euro-area finance ministers extracted concessions from Greek political leaders intended to pave the way for the endorsement of a 130 billion-euro aid package next week, Juncker said yesterday after chairing a conference call.
While “further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of program implementation,” Europe is set to make “all the necessary decisions,” he said in an e-mailed statement. German Chancellor Angela Merkel will travel to Rome tomorrow for talks with Italian Prime Minister Mario Monti.
The Dollar Index (DXY) gained for a fifth day as Moody’s said it may lower UBS AG, Credit Suisse AG and Morgan Stanley’s ratings by as many as three levels, boosting demand for safer assets.
The rating company said Goldman Sachs Group Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Citigroup Inc. were among companies that may be cut by two grades, adding that the “guidance is indicative only.”
The Moody’s comments “keep the focus on the big issues out there facing credit markets and banks,” said Jim Vrondas, a manager at online foreign-exchange dealer OzForex Ltd. in Sydney. “It does add to the uncertainty around Europe at the moment and though it’s not totally unexpected, it does seem to be on a massive scale. We will see the U.S. dollar relatively well supported.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, climbed 0.4 percent to 80.037 after rising to 80.078, the highest since Jan. 25.
The euro pared losses after Spain raised more money than targeted at a bond auction and French borrowing costs fell at a note sale.
Spain raised 4.07 billion euros from selling debt maturing in 2015 and 2019, compared with the target of 4 billion euros. France sold 2.09 billion euros of two-year notes at an average yield of 0.89 percent, down from 1.05 percent on Jan. 19. It also auctioned securities due in 2015 and 2017.
The euro has depreciated 1 percent in the past week, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was the biggest gainer, rising 1.5 percent.
The krona weakened after the Riksbank lowered its forecast for future interest rates, citing a drag on exports from Europe’s debt crisis.
Sweden’s currency fell against 13 of its 16 major counterparts after the central bank reduced the repo rate by a quarter of a percentage point to 1.5 percent and said the economy will grow 0.7 percent this year, down from an earlier prediction of 1.3 percent.
“The market is pricing additional easing from the Riksbank,” which is pressuring the krona, said Kasper Kirkegaard, a senior currency strategist at Danske Bank A/S in Copenhagen. “We think that the slowdown in the Swedish economy will force the Riksbank in to additional rate cuts.”
The krona fell 0.7 percent to 6.7731 per dollar after dropping to 6.7814, the weakest since Feb. 1. It slipped 0.2 percent to 8.8034 per euro.
Implied volatility of three-month options of Group of Seven currencies, a gauge of market’s reluctance to take risk, rose to 10.9 percent, the highest on a closing basis since Jan. 6, according to the JPMorgan G7 Volatility Index. An increase makes investments in currencies perceived as a haven more attractive.