By Matthew Brown and Yasuhiko Seki April 28 (Bloomberg) -- The euro traded near a one-year low against the dollar on speculation a European Union-led bailout package won’t be enough to stop Greece’s debt crisis spreading to neighboring countries. The European currency rose from near the lowest level in a month against the yen after dropping 2.3 percent yesterday. The pound dropped against the dollar after former Bank of England policy maker Timothy Besley said the U.K. economy remains in a “fragile state.” The Australian dollar rose on speculation accelerating inflation will prompt policy makers to raise interest rates next week. “The market is short euros and the emphasis is to the downside, but the market is aware they could be caught out by any comments from Germany about Greece,” said Steven Barrow, head of Group of 10 currency research at Standard Bank Plc in London. “An accelerated decline from here would require the Greece story to move on.” The euro was at $1.3191 at 6:38 a.m. in New York from $1.3175 yesterday, when it dropped 1.6 percent, the biggest one- day slide since April 27, 2009. It slid earlier to $1.3143, the lowest level since April 29 2009. The euro 0.7 percent to 123.76 yen and 0.8 percent to 87.03 British pence. The pound fell 0.7 percent to $1.5157. Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a surge in borrowing costs from Italy to Portugal and Ireland. Greek two-year notes plunged for a ninth straight day, pushing the yield above 20 percent, after its credit rating was downgraded three steps to junk by Standard & Poor’s yesterday. Portugal was lowered two steps to A-, the third-lowest investment grade. Greece’s Aid Package The combined 45 billion-euro aid package for Greece put forward by the European Union and International Monetary Fund may be increased to at least 70 billion euros from 45 billion euros amid concern the bailout will fail to control Greece’s debt crisis, the Financial Times reported today. Speculation of more IMF aid “is a mild positive for the euro,” said Yoh Nihei, a Tokyo-based trading group manager at Tokai Tokyo Securities Co., a unit of Tokai Tokyo Financial Holdings Inc. “There’s some covering of short positions” that bet on a weaker currency, he said. European Central Bank President Jean-Claude Trichet and IMF Managing Director Dominique Strauss-Kahn will brief German parliamentary leaders in Berlin around noon today about aid for Greece, which has met with opposition in Europe’s biggest economy. The joint EU-IMF package would require Germany to provide the biggest individual loan to Greece. Fear Index Futures traders increased bets the euro will fall against the dollar, according to figures from the Washington-based Commodity Futures Trading Commission. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 71,424 on April 20, compared with net shorts of 55,464 a week earlier. The Chicago Board Options Exchange Volatility Index, also known as the Wall Street fear index, jumped 31 percent yesterday, the most since October 2008, on concern that European deficits will spur a global financial crisis. Sterling weakened against all of its 16 most-traded counterparts after Besley said further evidence is needed to show the recovery is taking hold. A report last week showed Britain’s economy grew 0.2 percent in the first quarter, half the pace of the previous three months. ‘Sterling Negativity’ The pound has declined 6 percent versus the dollar in the past three months and is the only major currency to depreciate against the euro in that period amid concern the May 6 election will produce a stalemate. “We’re in an on-going period of sterling negativity,” said Stuart Bennett, a senior foreign-exchange strategist at Credit Agricole Corporate and Investment Bank in London. “This is linked to last week’s GDP numbers and lingering political uncertainty.” The so-called Aussie climbed against all of the 16 most- traded currencies tracked by Bloomberg after a report today showed consumer prices in the first quarter increased more than economists expected. “Underlying inflation looks a little bit stronger than the market had expected,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “People may increase expectations that the RBA will increase interest rates next week and that’s supporting the Australian dollar.” Fed Rates Australian consumer prices rose 0.9 percent in the first quarter, the Bureau of Statistics said in Sydney. Economists surveyed by Bloomberg News predicted a 0.8 percent gain. The RBA is forecast to raise its benchmark interest rate to 4.5 percent at the May 4 meeting, according to the median estimate of 23 economists in a Bloomberg News survey. The Australian dollar strengthened 0.4 percent to 91.95 U.S. cents and 0.9 percent to 86.18 yen. The yen fell against the dollar on speculation the Federal Reserve will signal that its policy of record low interest rates may be coming to an end, after it meets today. The Fed has kept the target rate in a range of zero to 0.25 percent since December 2008. “The Fed could change its wording in today’s statement, which is causing short-term U.S. yields to move higher,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo Mitsubishi UFJ in London. “We think it’s too premature to expect any significant change in the language from the Fed, so this move should not be sustainable.” The yen weakened 0.6 percent to 93.82 per dollar. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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