BLBG:Euro Falls to 2-Week Low as Downgrade Risks Point to Region's Debt Crisis
The euro weakened on speculation some European nations will struggle to raise funds amid the region’s debt crisis after rating companies downgraded the creditworthiness of Ireland and considered additional cuts.
The single currency depreciated versus 14 of 16 major counterparts, falling to two-week lows against the dollar and the yen as the European Central Bank warned of “concerns” about Irish legislation to fix its banking system. Costs to insure French government debt rose to a record, suggesting the nation may be at risk of losing its top AAA rating. The Swiss franc rose to a record against the euro as investors sought refuge from the region’s sovereign-debt situation.
“The rating agencies have been pretty negative in the past couple of weeks,” Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “There’s going to be some tenor opportunities out of the ECB and people are going to watch those.”
The euro slipped 0.2 percent to $1.3158 as of 8:44 a.m. in New York, after declining to $1.3125, the weakest since Dec. 2. The common currency fell 0.6 percent to 110.16 yen, from 110.77 yen, the lowest since Dec. 7. The U.S. currency traded at 83.70 yen from 83.78 yen.
The cost to insure French government debt tripled this year, reaching an all-time high of 105.5 today, according to data provider CMA.
Swaps Implication
Credit-default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.
“The rating agencies’ continued downgrades and warnings on the ratings on European countries will leave the euro vulnerable,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note Dec. 17. “We continue to favor the euro-dollar breaking lower from its recent trading range.”
Divisions in the euro-area leadership were highlighted as the ECB said it has “serious concerns” that Irish draft legislation to fix the banking system threatens the central bank’s ability to run its liquidity operations. The bank commented in a position paper dated Dec. 17.
Irish Banking
“The ECB clearly feels that the fact the Irish government can alter the status and the treatment of incumbent bond-holders of the Irish banks could raise uncertainty about the collateral which is used in the ECB refinancing operations,” said Stephan Maier, a foreign-exchange strategist at UniCredit SpA in Milan. “This story displays as well that there was a lack of coordination between the ECB and the Irish, which might be weighing on the market too.”
Moody’s Investors Service lowered Ireland’s credit rating by five levels to Baa1 on Dec. 17, the day after it placed Greece on review for possible downgrade. Standard & Poor’s put Belgium on negative watch last week.
The Swiss franc climbed to a euro-era record, appreciating 0.8 percent to 1.2703, before trading at 1.2694. Against the dollar it appreciated 0.4 percent to 0.9645.
The Swiss National Bank last week held the three-month Libor target rate at 0.25 percent in an attempt to keep a lid on the currency. The franc’s strength against the euro has threatened the country’s export-led recovery.
Swiss Haven
“Since Ireland has kicked off the new bout of tension, it is deemed as the most regional safe-haven currency play,” Derek Halpenny, European head of currency research at Bank of Tokyo- Mitsubishi UFJ Ltd. in London, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene. “The concern in Europe related to budget deficits is something that Switzerland doesn’t have to deal with.”
The dollar was boosted against the euro by the demand for safety and optimism the world’s largest economy is improving. The Commerce Department will report tomorrow that the U.S. economy grew at a 2.8 percent annual rate during the third quarter, up from its initial estimate of a 2.5 percent pace, according to the median of a Bloomberg News survey of 61 economists.
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, rose as much as 0.3 percent.
Korean Peninsula
The South Korean won touched a three-week low against the dollar as military tensions with North Korea damped demand for the nation’s assets and after the government proposed tighter curbs on capital flows.
A levy is planned for foreign-currency borrowing by banks, the government said yesterday. South Korea today commenced a live-firing drill on Yeonpyeong Island, a month after North Korea shelled the island close to the disputed sea border off the peninsula’s west coast, killing four people.
The won dropped to as low as 1,172.25, the weakest since Nov. 24, before trading at 1,150.25, from 1,152.58.
Exchange-rates for Australia, Canada and New Zealand, all nations whose economies are tied to commodities, have appreciated at least 20 percent since the start of 2009 as their central banks boosted interest rates to curb inflation from rising prices of their raw-materials exports, according to data compiled by Bloomberg.
Surveys of strategists and economists by Bloomberg News show none of the so-called commodity currencies are likely to strengthen next year.
“The commodity currencies are at extremes,” said Ken Dickson, a money manager who helps oversee $240 billion at Standard Life Investments in Edinburgh. “The Aussie dollar is fully valued. The upside is limited and we would not be advocating long positions.”
To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
