SF: Euro Falls Against Yen as Italy's Berlusconi Faces Budget Vote
Nov. 7 (Bloomberg) -- The euro fell versus the yen as Italian Prime Minister Silvio Berlusconi faces a budget vote amid pressure to resign, stoking concern the region's third- largest economy will struggle to manage its debt load.
The euro weakened earlier against the dollar as concern mounted that political instability in Italy may push bond yields to levels that will force the region's second-most indebted nation to seek a rescue. It erased the decline as stocks rose. The Swiss franc fell after Swiss National Bank President Philipp Hildebrand said the central bank expects the currency to weaken further.
"The market is really looking for something solid to be done by Italy on the fiscal front, and it seems that that means Berlusconi has to go," said Mary Nicola, a New York-based currency strategist at BNP Paribas SA. "Headline risk is going to continue to be the main driver. If you look at how the yen and dollar have performed so far today, they are acting as safe havens."
The euro weakened 0.2 percent to 107.69 yen at 9:51 a.m. New York time. The 17-nation European currency was little changed at $1.3801, after falling to as low as $1.3681 earlier. The dollar lost 0.3 percent to 78.02 yen.
The Standard & Poor's 500 Index rose 0.3 percent as Reuters reported the European Investment bank told European finance ministers it could be reinforced temporarily to support the region's banking sector.
The franc depreciated 1.4 percent to 1.2367 per euro, after touching 1.2394, the weakest level since Oct. 20 amid bets the bank will adjust its cap of 1.20 francs per euro set on Sept. 6. It declined 1.3 percent to 89.61 centimes versus the dollar.
Italian Yields
Yields on Italy's 10-year bonds jumped to as high as 6.68 percent, approaching the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. The rise in Italian yields pushed the spread with the German securities to 491 basis points, also a euro-era record.
Italy, which is due to auction treasury bills this week, sells more than 200 billion euros ($275 billion) of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is more than the borrowing of Greece, Spain, Portugal and Ireland combined.
Berlusconi's majority in Italy's lower house unraveled with the defection of two allies last week, and after a third quit yesterday.
The euro earlier pared losses after Il Foglio reported Berlusconi may step down and push for early elections. The prime minister later denied the report.
'France Will Be Next'
"If Italy had the same problems that Greece had, it would not be possible to have the euro anymore," said Luca Silipo, chief Asia-Pacific economist in Hong Kong at Natixis SA, who previously worked at Italy's central bank. "If you have a bankruptcy of Italy, then France will be next. You don't want Italy to have the same problem as Greece."
Losses in the euro were limited after Greek Prime Minister George Papandreou met Antonis Samaras, the leader of the main opposition party, and "agreed to form a new government with the aim of leading the country to elections immediately after the implementation of European Council decisions on Oct. 26," according to an e-mailed statement from the office of President Karolos Papoulias in Athens.
Papandreou has already said he won't lead the new government, the statement said.
Wagers by hedge funds and other large speculators on a drop in the euro to 60,060 on Nov. 1, compared with net shorts of 76,512 a week earlier, according to figures from the Washington- based Commodity Futures Trading Commission.
Swiss Inflation
Swiss inflation unexpectedly slowed to a negative rate in October, data today showed. Consumer prices decreased 0.1 percent from a year earlier after rising 0.5 percent in September, the Federal Statistics Office in Neuchatel said today. Economists forecast prices to rise 0.2 percent.
Unless the franc depreciates, "it could lead to deflationary developments and weigh heavily on the economy," Hildebrand told NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday. "We are ready to take further measures in case economic prospects and a deflationary development should require it."
"You can argue that the latest consumer prices data appeared to be deflationary," said Jane Foley, a senior currency strategist at Rabobank International in London. "That suggests to me there is a potential for the SNB in the next couple of months to try and push up its euro-franc floor."
The franc, sought in times of financial turmoil, has risen 9.4 percent versus the euro in the past 12 months, threatening Swiss exports and boosting the risk of deflation.
