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 yen advanced against all its most-traded counterparts as concern the credit ratings of France’s three largest banks may be cut encouraged demand for a refuge. The euro also weakened as fresh Greek austerity plans failed to calm financial-market stress. “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.” The euro dropped 0.9 percent to 105.07 yen at 7:57 a.m. in New York, from 105.99 on Sept. 9, after sliding to 103.90, the lowest level since June 2001. The euro traded at $1.3636 after decreasing to $1.3495, the weakest since Feb. 15. The yen gained 0.8 percent to 77 per dollar. The Stoxx Europe 600 Index dropped 2.8 percent, while futures on the Standard & Poor’s 500 Index decreased 1.7 percent. The yield on the 10-year Treasury note fell to a record low 1.8770 percent. The Australian dollar fell 1.2 percent to $1.0317 on reduced demand for higher-yielding assets. The Canadian dollar touched a level weaker than parity with its U.S. counterpart for the first time in a month, sliding to C$1.0017. Carry Trades Slowing global growth 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 in which investors sell currencies with low interest rates to buy ones in 24 markets with higher yields has tumbled 2.6 percent this month. 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. Merkel’s government is 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 officials said Sept. 9. Merkel is due to hold talks on the debt crisis with European Commission President Jose Manuel Barroso today. Progress Report 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. 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. The 14-day relative strength index for the euro against the dollar fell to 28.52, less than 30 for a second day, signaling it may have declined too fast and may reverse. Implied Volatility One-month implied volatility on the currency pair reached 17.9 percent, the highest level since May 2010. The cost of options protecting on a drop in the euro also increased relative to options hedging an advance. 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 Moody’s Investors Service may cut their credit ratings 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 ($5.5 billion) in assets by 2013 in an effort to reassure investors about its finances. Japan’s yen was the best performer among the 10 developed nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes, rising 1.2 percent. The yen tends to gain during economic and financial turmoil because Japan’s current account surplus makes it less reliant on foreign capital. Japanese Finance Minister Jun Azumi ended his first Group of Seven meeting without his counterparts objecting to his pledge to take “bold actions” to stem yen gains, paving the way for a fresh intervention if he deems it necessary. “We will continue to closely monitor developments, and we will take bold actions, especially against speculative trading,” Azumi said after G-7 finance chiefs met in Marseille, France. “No one was opposed to my explanation. I think I gained an understanding of our stance on foreign-exchange rates.” 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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