Monday, August 23, 2010

Euro slumps

The euro dropped for a second week against the dollar to a five-week low as weaker economic data and calls by a European Central Bank official for more economic aid damped investor appetite for higher-yielding currencies.

The 16-nation currency reached a seven-week low against the Swiss franc after ECB council member Axel Weber Aug. 19 told Bloomberg Television the central bank should assist financial institutions to prevent year-end liquidity tensions. The dollar and yen rose against most of their major counterparts as data indicated the global economic recovery may be faltering. The Japanese finance minister is set to meet the prime minister this week to discuss the nation’s currency.

“The exceptionally weak numbers in the last couple of days in the U.S., that has weighed on risk appetite,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “In the euro, Canadian dollar and Australian dollar, the price action is very disappointing, the initial bias would be to sell these currencies and for more dollar strength.”

The euro fell 0.3 percent to $1.2712 in New York from 1.2754 in the five days ended Aug. 13. It touched 1.2673 yesterday, the weakest since July 13. Japan’s currency dropped 1 percent to 108.83 per euro from 109.92 last week in New York, after reaching 108.31, the strongest since July 1. The euro sank 2 percent to 1.3143 francs from 1.3408 francs a week ago, after touching 1.3140 francs. The yen rose 0.7 percent to 85.62 per dollar.

The Canadian dollar rose 0.4 percent to C$1.0475.

Stocks Fade

The Standard & Poor’s 500 Index fell for the second week, declining 0.7 percent. The Stoxx Europe 600 Index retreated for a third week, dropping 1.3 percent, and crude-oil futures for September delivery fell 2.6 percent.

“Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber, who heads Germany’s Bundesbank, said in an interview with Bloomberg Television in Frankfurt yesterday. “It’s clear that we need to re-embark on a normalization procedure.”

The euro accelerated its decline and the yield on Germany’s 30-year bond fell to a record low yesterday as Weber’s comments suggested the ECB will support the region’s banks for longer than some investors expected.

“Regional worries about peripheral eurozone debt have also resurfaced in recent weeks,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, wrote in a note to clients. “We are seeing steady net inflows into German bunds, which offer relative safety and liquidity in the region.”

Currency Flows

Cumulative inflows to German debt this week totaled one- and-a-half times the average amount compared with the previous year, according to iFlow data from BNY Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration.

“Weber indicating that he thinks it’s necessary to continue unlimited funding until the end of the year was a real red flag to the market,” said Jessica Hoversen, a Chicago-based analyst at the futures broker MF Global Holdings Ltd. “You have a lot of event risk over the weekend: the Australian election, the possibility of a conversation on the yen.”

Current Prime Minister Julia Gillard and opposition leader Tony Abbott will face off in an election that may result in a hung parliament. Demand for Australia’s dollar was limited as polls ahead of the election showed voters almost evenly split between Gillard’s Labor Party and opposition Liberal-National coalition.

Australia’s currency fell 0.1 percent to 89.39 U.S. cents this week.

Slower Growth

Revisions to U.S. economic growth next week will probably indicate the pace of the expansion slowed even more in the second quarter, to a 1.4 percent annual rate from the 2.4 percent in a preliminary report on July 30, according to a Bloomberg survey. Japan’s export growth slowed to 21.8 percent in July from 27.7 percent in June, and the Ifo institute’s German business climate index slid to 105.5 in August from 106.2 the previous month, separate surveys showed before the Aug. 25 data.

The Dollar Index, which IntercontinentalExchange Inc. use to track the greenback against the currencies of six major trading partners, rose 0.1 percent to 83.057 It reached 83.283 yesterday, the strongest level since July 22.

Claims Rise

U.S. initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, Labor Department figures showed in Washington. Claims exceeded all estimates of economists surveyed by Bloomberg News and compared with the median forecast of 478,000.

Speculation has mounted the Japanese government will take steps to curb the currency’s rally. The yen has gained 14 percent this year, the best performance among 10 developed-world currencies, Bloomberg Correlation-Weighted Currency Indexes show.

“If the yen becomes considerably volatile or breaks 80, chances for an emergency meeting would become high,” said Hideo Kumano, a former Bank of Japan official who is now chief economist at the Dai-Ichi Life Research Institute in Tokyo. “The impact of further accommodative steps may be limited; it would mainly be aimed at preventing the yen from becoming excessively strong.”

The yen’s climb to a 15-year high of 84.73 against the dollar on Aug. 11 has stoked concern that exporters’ earnings could weaken and deflation might deepen. Finance Minister Yoshihiko Noda said today he will meet with Prime Minister Naoto Kan next week to discuss the economy and currency.

Japan hasn’t intervened in the currency market since March 2004, when the yen was at about 109 per dollar. Central banks intervene in the foreign-exchange market when they buy or sell currencies to influence exchange rates.

To contact the reporter on this story: Catarina Saraiva in New York at

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