The euro weakened versus most of its major peers tracked by Bloomberg after Moody’s Investors Service cut Portugal’s credit rating to junk, stoking concern more of the region’s most indebted nations will be downgraded. The 17-nation common currency slid versus the Swiss franc, a traditional haven from financial turmoil, as investors and government officials struggle to devise a role for creditors in a bailout of Greece without triggering a default. The Dollar Index advanced as China’s central bank raised benchmark deposit and lending rates by 25 basis points, effective tomorrow. “The market doesn’t really know where the euro is going to be in a year’s time because it has no idea how the euro zone is going to navigate its way through the crisis,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “It will be choppy because there’s greater uncertainty now than there has been for a long time.” The euro weakened 0.7 percent to $1.4325 as of 7:53 a.m. in New York, erasing an earlier advance of as much as 0.3 percent. It slid 0.7 percent to 116.15 yen. The Swiss franc strengthened 0.5 percent to 1.2067 against the euro and was 0.2 percent weaker at 84.25 centimes per dollar. Moody’s lowered Portugal’s long-term government bond ratings to Ba2 from Baa1. The reductions stem partly from “the growing risk that Portugal will require a second round of official financing before it can return to the private market,” Moody’s said in a statement yesterday. ‘Hyperactive’ Rating Agencies The Portuguese 10-year government bond yield jumped to a record 12.30 percent, while Irish, Italian, Spanish and Greek yields also surged on speculation more ratings cuts may follow. “I’m surprised that the market was surprised by the downgrade,” said Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “It was only natural to expect a downgrade and we would expect the same with other periphery countries over the weeks ahead given the ratings agencies are pretty hyperactive.” Germany today revived a proposal for a debt swap to lengthen Greece’s bond maturities even as the chief of the biggest group of international financial companies recommended that European governments buy back outstanding Greek securities. The financial firms will discuss a proposal from French banks to roll over 70 percent of Greece’s bonds maturing by mid-2014 into new 30-year securities backed by AAA-rated collateral. European Union leaders want creditors to voluntarily roll over about 30 billion euros of Greek bonds to support loans by the EU and the International Monetary Fund. ‘Range of Options’ “We’re going to discuss a range of options there, including variations on the original French proposal as well as options relating to buybacks,” said Charles Dallara, managing director of the Institute of International Finance. The Washington-based IIF represents more than 400 of the world’s biggest banks and insurers, including Deutsche Bank AG and BNP Paribas SA, and has led the investor talks. “So many stakeholders are involved in Europe’s debt crisis,” said Daisaku Ueno, president of Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan’s largest online currency broker. “We don’t know who will say what, or when. The euro can’t be on an uptrend.” The ECB will increase its main refinancing rate to 1.50 percent tomorrow from 1.25 percent, according to all 55 economists in a Bloomberg survey. Swaps traders are betting the ECB will raise its target rate by 76 basis points over the next 12 months. China Rates China raised benchmark interest rates for the third time this year after inflation accelerated to the fastest pace since July 2008. The one-year deposit rate will rise to 3.5 percent, the People’s Bank of China said on its website today. The move may fuel concern that monetary tightening will trigger a slowdown in the world’s second-biggest economy. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, rose 0.5 percent. The U.K. pound weakened versus most of its 16 major counterparts as investors sought the safest assets. It slipped 0.4 percent to $1.6000 and 0.4 percent to 129.71 yen. The Philippine peso climbed to its strongest level since May 3 after Fitch Ratings forecast the economy would expand as much as 6 percent this year and next. The rating agency said today its outlook on Philippine banks is stable, “underpinned by an improving domestic economy and relatively low asset- quality risk.” Growth was 4.9 percent in the first quarter, the weakest pace since the final three months of 2009. “The Fitch comments are validating the improved macro fundamental story that’s been making the rounds the past few weeks,” said Radhika Rao, a Singapore-based economist at Forecast Pte. The peso strengthened for a seventh day against the greenback, its longest winning streak since January, gaining 0.4 percent to 42.900 per dollar, according to Tullett Prebon Plc. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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