By Yoshiaki Nohara and Ron Harui Feb. 25 (Bloomberg) -- The euro dropped to a one-year low against the yen amid concern Greece’s credit rating will be lowered as it struggles to push through fiscal cuts demanded by the European Union, curbing demand for the region’s assets. Europe’s single currency fell toward a nine-month low against the dollar after Standard & Poor’s and Moody’s Investors Service said Greece faces further downgrades as early as next month as it copes with the EU’s biggest budget deficit. The yen advanced versus all 16 major counterparts on speculation Japanese exporters bought the currency on the second-to-last trading day of the month. “There are concerns that Greece may not be rescued,” said Satoshi Okagawa, head of the foreign-exchange forward trading group at Sumitomo Mitsui Banking Corp. in Tokyo. “This is causing selling of the euro and buying of the yen, and leading to risk aversion.” The euro dropped to 120.74 yen as of 5:58 a.m. in London from 122.03 yen in New York yesterday. It touched 120.46 yen, the lowest since Feb. 24, 2009. The dollar fell to 89.69 yen from 90.15 yen. The dollar rose to $1.5333 per British pound from $1.5408, after touching $1.5326, the strongest since May 19. The 16-nation euro declined to $1.3464 from $1.3538. It touched $1.3444 on Feb. 19, the lowest since May 18. The European currency has fallen 2.9 percent versus the dollar in February, heading for a third monthly loss, its longest stretch since November 2008. Euro Carry Trades The euro will become a favorite funding currency for carry trades as Greece’s crisis weighs on regional interest rates, according to Deutsche Bank AG. The three-month London interbank offered rate, or Libor, for euro loans dropped below 0.6 percent for the first time last week, down from more than 5 percent after the collapse of Lehman Brothers Holdings Inc. “Greece’s crisis has highlighted political and structural weakness in the euro-zone,” said Koji Fukaya, a senior currency strategist for Deutsche Bank in Tokyo. “First, it remains unclear whether any aid will be available. And even if any rescue plan comes out, it will take time to see if it’d work.” The currency may slump further to $1.25, Fukaya said, a level last seen in March 2009. In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates, increasing sales of the borrowed currency. Rating Downgrade The cost of protecting against default on Greek government bonds increased 13 basis points to 384 yesterday, according to CMA DataVision prices. “We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement released late yesterday. Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in Tokyo today Greece faces a downgrade of “a couple of notches” within a few months if it can’t meet the objectives of its deficit reduction plan. Standard & Poor’s, Moody’s and Fitch Ratings downgraded Greece’s credit rating in December as its deficit approached 13 percent of gross domestic product. “I’m not sure if other nations have enough resources to help Greece,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “If the issue is neglected, that will stoke concerns about the euro. The dollar remains strong against the euro on a relative basis.” The Dollar Index, which is used to track the currency against those of six major U.S. trading partners such as the euro and the yen, advanced 0.4 percent to 81.106. It touched 81.342 on Feb. 19, the strongest since June 15. ‘Adjust Accordingly’ The yen strengthened on prospects Japanese companies repatriated overseas earnings before the end of the month. “There’s talk of exporters buying the yen, possibly due to month-end demand,” said Takashi Kudo, general manager of market information service in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “These flows appear to be concentrated in the euro-yen, which has a downward bias today.” Japanese companies said they remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to a Cabinet Office survey released on Feb. 19. That’s stronger than the 97.33 breakeven point they provided last year. A rising yen makes the nation’s exports less competitive abroad. Large manufacturers expect the yen to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s quarterly Tankan survey. To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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