Euro Falls on Concern S&P Downgrade Will Hurt French Debt Sale Today

Dated Posted: 2012-01-16

Jan. 13 -- Axel Merk, president and chief investment officer at Merk Investments LLC, talks about outlook for monetary policies of the world's major central banks and today's downgrade of France's AAA credit rating by Standard & Poor's. He speaks with Mark Crumpton on Bloomberg Television's "Bottom Line."

The euro weakened for a second day, touching an 11-year low versus the yen after Standard & Poor’s stripped France of its top credit rating and cut eight other euro-zone nations.

The shared currency extended a six-week-long drop against the greenback before a series of debt auctions this week by European nations begins with France’s bill sale today. The yen and dollar strengthened against most major peers as concern that Europe’s financial turmoil will intensify boosted demand for safety. Australia’s dollar slid before data on economic growth in China, the nation’s biggest trading partner.

“Those downgrades provided another excuse for the speculative community to add to their short positions in euro,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “We’ve got a few more European debt auctions out there as market sentiment continues to be tested.” A short position is a bet that an asset will decline in value.

The euro fell 0.3 percent to $1.2646 at 6:46 a.m. in London from the close in New York on Jan. 13 when it touched $1.2624, the least since Aug. 25, 2010. The shared currency depreciated 0.4 percent to 97.16 yen after dropping to 97.04, the lowest since December 2000. The dollar dipped 0.2 percent to 76.83 yen.

U.S. markets are closed for a holiday today.

France will auction as much as 8.7 billion euros ($11 billion) in bills today, followed by the European Financial Stability Facility’s 1.5 billion-euro sale of bills and Greece’s offering of bills tomorrow. Spain will also offer debt tomorrow and Jan. 19, while Portugal will sell bills on Jan. 18.

‘Nervous’ Markets

“Markets are going to remain pretty nervous” until we see the results of European debt auctions this week, said Michael Turner, a fixed-income strategist in Sydney at Royal Bank of Canada. “The yen and the dollar should outperform.”

The euro dropped on Jan. 13 before S&P lowered the top ratings of France and Austria one level to AA+, with “negative” outlooks, while affirming the ratings of countries including Germany, Belgium and the Netherlands. The company also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia by one level.

The EFSF, the euro-region’s bailout fund needed to tap markets to finance aid for Greece, Ireland and Portugal, may lose its top rating if any of the bailout fund’s guarantors face a downgrade, S&P said last month.

Italy’s government must refinance about 341 billion euros of securities coming due this year, with another 54 billion euros in interest payments, data compiled by Bloomberg show. France has 266 billion euros in debt coming due, plus 39 billion euros in interest, while Germany needs to find 193 billion euros for principal repayments and 22 billion euros for interest.

‘Disorderly Default’

Talks between Greece’s Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the managing director of the Institute of International Finance, which represents private creditors, will resume Jan. 18, according to a Greek Finance Ministry official who declined to be identified. Greece’s creditor banks last week broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds.

“We remain concerned that Greece may suffer a disorderly default in March,” Mansoor Mohi-uddin, chief foreign-exchange strategist at UBS AG in Singapore, wrote in a Jan. 14 note. “A Greek default would have a major impact on the euro as it would spread contagion to other bond markets in the euro zone.”

Euro Shorts

Futures traders increased bets to a record that the euro will weaken against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise surged to 155,195 in the week ended Jan. 10, data from the Commodity Futures Trading Commission showed on Jan. 13.

“Talks about S&P rating cuts had been around since last year,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd., which provides foreign-exchange margin trading services. “Short positions on the euro have accumulated to the extent that there will be an unwinding of these positions to take profit.”

The euro has depreciated 1.8 percent this month, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 0.9 percent over the same period, while the yen gained 1.1 percent.

Yen’s Range

Former Japanese Finance Ministry official Eisuke Sakakibara said the yen will trade in a range from 72 to 79 per dollar for the next six months. Intervention in the currency market will only work with U.S. cooperation, he said today at the Foreign Correspondents’ Club of Japan in Tokyo. Japan’s government intervened in the foreign-exchange market at least three times last year to keep the yen’s gains from hobbling the country’s recovery.

The Australian dollar weakened against its U.S. and Japanese counterparts before data tomorrow that economists say will show China’s growth slowed in the fourth quarter.

Chinese gross domestic product rose 8.7 percent from a year earlier, the slowest pace since the second quarter of 2009, according to the median forecast of economists surveyed by Bloomberg News.

The so-called Aussie slipped 0.3 percent to $1.0289, while the New Zealand dollar lost 0.2 percent to 79.32 U.S. cents.

 

Source:  Bloomberg