The euro dropped to its lowest level since 2001 against the yen as speculation German Chancellor Angela Merkel is preparing for a Greek default curbed demand for the 17-nation currency. The dollar strengthened for a third day as fresh Greek austerity plans failed to calm financial-market stress in the euro area. The yen advanced at least 0.8 percent versus all 16 major peers after Group of Seven policy makers said they prefer markets to set currency rates. The Australian and New Zealand dollars paced declines in higher-yielding currencies as stocks slumped amid reports France’s three largest banks may have their credit ratings lowered. “There’s always the underlying risk of a Greek default,” said Chris Walker, a foreign-exchange strategist at UBS AG in London. “Markets are pricing that in right now. There’s no reason as to why the euro can’t go further” against the dollar. The euro dropped 1.1 percent to 104.83 yen at 11:31 a.m. in London after sliding to 103.90, the least since June 2001. It fell to $1.3495, the weakest since Feb. 15, before trading 0.3 percent weaker at $1.3609. The yen gained 0.8 percent to 77 per dollar. IntercontinentalExchange Inc.’s Dollar Index rose 0.1 percent to 77.269 after touching 77.784, the highest level since Feb. 17. The MSCI Asia Pacific Index of stocks slid 2.3 percent and the Stoxx Europe 600 Index dropped 2.6 percent. The yield on German bunds, Europe’s benchmark government debt securities, fell to a record 1.71 percent, while rates on Greek securities reached a record high and Italian and Spanish yields rose. Germany’s Plan Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said on Sept. 9. Merkel is due to hold talks on the debt crisis with European Commission President Jose Manuel Barroso today. Lars Feld, a member of the German government’s council of economic advisers, said he thinks the government is discussing an orderly restructuring of Greek debt. “It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.” Germany will decide on a course of action after receiving the results of a Greek progress report, a government spokesman said, speaking on the customary condition of anonymity. Greek Vote The Greek Cabinet voted yesterday to cut one month’s wages from all elected officials and impose an annual charge on all property for two years, Finance Minister Evangelos Venizelos told reporters. The nation has the cash reserves to cover its needs for October, Ta Nea newspaper reported, citing comments from Deputy Finance Minister Filippos Sachinidis. The cost of insuring European sovereign and bank debt rose to records, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments soaring 14 basis points to 350. The premium European banks pay to borrow in dollars for 12 months through the swaps markets increased to the most since December 2008. French Banks BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks by market value, led European equity declines after two people with knowledge of the matter said the banks may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings. Societe Generale, France’s second-largest bank, said it plans to sell 4 billion euros in assets by 2013 in an effort to reassure investors about its finances. “Investor risk aversion is highly likely to increase further, given the multitude of risks surrounding Europe’s situation this week,” said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase & Co. in Tokyo. “Against this backdrop, the yen, and to a lesser extent the dollar, may strengthen.” The yen gained 1.3 percent today, the best performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar, the second- best performer, advanced 0.4 percent. The yen tends to appreciate during economic and financial turmoil because Japan’s current account surplus makes it less reliant on foreign capital. Aussie Drops The Australian dollar dropped to the lowest since Aug. 12 versus its U.S. counterpart after the Bureau of Statistics said the nation’s trade surplus narrowed to A$1.83 billion in July. The median estimate in a Bloomberg News survey of 14 economists was for a surplus of A$1.9 billion. The so-called Aussie fell to $1.0339, from $1.0470 on Sept. 9, and New Zealand’s currency slid to 81.90 U.S. cents from 82.21 U.S. cents. The Canadian dollar fell to parity with its U.S. counterpart for the first time in a month, reaching as low as C$1.0017 per dollar. Slowing economic growth around the world is punishing investors who bet on Australian and Brazilian assets using money borrowed in dollars and yen with the biggest losses in more than a year. A UBS index tracking the performance of carry trades where investors sell currencies with low interest rates to buy ones in 24 markets with higher yields has tumbled 2.6 percent this month. “Risk aversion is a main driving force in the market,” Ian Stannard, the London-based head of European currency strategy at Morgan Stanley, said in a telephone interview on Sept. 6. “The yen and the dollar are likely to benefit from this demand.” To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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