BLBG: Euro Declines as Economy Contracts Most in at Least 13 Years
The euro fell against the dollar and extended a weekly loss versus the yen as the economy of the 16- nation region contracted the most in at least 13 years, raising concern the pace of recovery will be slow.
The yen extended its weekly rally against counterparts including the South African rand and Norwegian krone as a drop in stocks discouraged investors from buying higher-yielding assets funded in Japan’s currency. The euro posted its first weekly decline versus the dollar in a month as gross domestic product in the region shrank.
“There has been a large setback to the recovery camp because of the euro-zone GDP numbers,” said Samarjit Shankar, a director of global strategy in Boston at Bank of New York Mellon Corp., which administers more than $20 trillion in assets. “You’re seeing another ebb and flow of risk appetite.”
The euro slid 1.1 percent to $1.3488 at 4:30 p.m. in New York, from $1.3639 yesterday, and posted a weekly decrease of 1.1 percent. The euro lost 1.9 percent to 128.23 yen from 130.67 for a 4.5 percent decline this week. The dollar dropped 0.8 percent to 95.07 yen from 95.80, extending its reduction this week to 3.4 percent, the biggest since October.
The yen gained this week versus all of the 16 most actively traded currencies tracked by Bloomberg on speculation weak economic reports will reduce demand for the carry trade, in which investors get funds in a country with low borrowing costs and buy assets where they expect returns to be higher.
Yen Versus Rand
Japan’s currency rallied 9.7 percent to 10.85 against the South African rand and increased 7.1 percent to 14.51 versus Norway’s krone this week. The Bank of Japan’s target lending rate of 0.1 percent compares with 8.5 percent for South Africa and 1.5 percent for Norway. U.S. stocks fell today, extending the weekly drop in the Standard & Poor’s 500 Index to 5 percent, the biggest since March.
Gross domestic product of the nations that use the euro contracted 2.5 percent in the first quarter after decreasing 1.6 percent in the previous quarter, the European Union’s statistics office said today in Luxembourg. It’s the biggest drop since the beginning of euro-area GDP data in 1995 and exceeded the 2 percent reduction forecast in a Bloomberg survey of economists.
“It’s a really bad piece of data, and it’s going to get worse because the European Central Bank has only come up with half-hearted measures,” said Geoffrey Yu, a strategist in London at UBS AG, the world’s second-largest currency trader. “This is going to be bad for the euro.”
Franc Erases Gain
Switzerland’s franc erased its gains against the euro, falling the most in a week after approaching 1.5, a level foreign-exchange analysts dubbed the central bank’s “line in the sand.” The currency slid as much as 0.6 percent, the biggest intraday drop since May 7, to 1.5146 per euro.
The franc plunged against the euro on March 12 by the most since the common currency’s 1999 debut after the Swiss National Bank said it would buy corporate bonds and foreign currencies to cushion the nation’s economy. Policy makers will “decisively” implement policy to prevent an appreciation in the franc, Thomas Jordan, a governing board member, said yesterday.
“Any move toward 1.50 will try the SNB’s patience,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “There’s speculation that the SNB may be intervening.”
The dollar earlier pared its loss against the yen as a U.S. report indicated the worst of the recession may be over. The Federal Reserve Bank of New York’s general economic index increased in May to minus 4.6 from minus 14.7 in the prior month, the bank said today. Readings below zero for the Empire State index signal manufacturing is shrinking.
China’s Retail
China’s retail sales grew 14.8 percent last month from a year earlier, following March’s 14.7 percent gain, the National Bureau of Statistics reported May 13.
“If the green shoots in the U.S. and China hold up for a couple of months, then after a long lag Europe will probably come back,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York.
The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, franc, Canadian dollar and Swedish krona, rose 1 percent to 83.059 today and increased 0.7 percent for the week.
International demand for long-term U.S. financial assets rose in March as China added to its portfolio of Treasury securities, according to government data. Total net purchases of long-term equities, notes and bonds rose a net $55.8 billion, compared with buying of $22 billion in February, the Treasury said today in Washington.
New Zealand Dollar
New Zealand’s dollar fell 2.2 percent to 58.39 U.S. cents today and recorded a 3.3 percent weekly drop against the greenback after the statistics office said retail sales declined for a record sixth quarter, dropping 2.9 percent, adjusted for inflation, from the previous three months.
The currency, which gained 20 percent against the dollar since the start of March, is an “accident waiting to happen,” Greg Gibbs, a foreign-exchange strategist in Sydney at RBS Group Australia Ltd., wrote in a report today.
