BLBG:Euro Falls, Snaps Weekly Gain, Before EU Leaders Meet on Crisis; Yen Rises
The euro declined against the dollar, snapping a five-day advance, before European Union leaders meet in Brussels to discuss the region’s debt crisis.
The yen rose for a third day versus the 17-nation euro as Italy prepares to sell bonds today after the country was downgraded by Fitch Ratings. Demand for the euro was supported amid speculation Greece and its private-sector creditors will reach an agreement on a debt-swap plan this week. The Australian and New Zealand dollars weakened as stocks declined, sapping demand for riskier assets.
“Even with a resolution, the bottom line is that there’s going to be tough medicine having to be swallowed by Europe,” said Gavin Stacey, chief interest-rate strategist at Barclays Capital in Sydney. “There is a greater risk of a pullback in euro strength.”
The euro slid 0.5 percent to $1.3154 at 8:25 a.m. London time. It strengthened 2.2 percent against the dollar last week. The common currency weakened 0.6 percent to 100.83 yen. The dollar was little changed at 76.65 yen.
The Stoxx Europe 600 Index of shares fell 0.6 percent and the MSCI Asia Pacific index declined 0.9 percent, having advanced 1.9 percent last week.
EU leaders will meet in the Belgian capital today to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro rescue fund to be set up this year.
Greek Debt Swap
Greece and its creditors are “close” to an agreement on a debt exchange, the Institute of International Finance said in a Jan. 28 statement. The IIF is negotiating with the Mediterranean nation on behalf of private bondholders.
Italy is scheduled to sell debt maturing in 2016, 2017, 2021 and 2022 today. Fitch cut the ratings of Italy, Spain and three other euro-area countries on Jan. 27, saying they lack financing flexibility in the face of the regional debt crisis.
Italy, the euro area’s third-largest economy, was cut two levels to A- from A+. Spain was also lowered two grades, to A from AA-. Ratings on Belgium, Slovenia and Cyprus were also reduced, while Ireland’s was maintained.
“Every auction brings with it new risk that, for whatever reason, the market may not digest the bonds,” said Barclays’s Stacey, who predicts the euro will decline to $1.20 by the middle of this year.
Futures traders increased bets that the euro will fall versus the dollar, boosting so-called net shorts to a record for a fifth-straight week. The difference between wagers that the shared currency will fall versus those that it will rise widened to 171,347 on Jan. 24, data from the Commodity Futures Trading Commission showed on Jan. 27.
Australian, N.Z. Dollars
Higher-yielding currencies, including the Australian and New Zealand dollars, jumped last week after the Federal Reserve pledged to continue easy monetary policies to prop up the U.S.
Fed Chairman Ben S. Bernanke said on Jan. 25 the central bank is considering additional bond purchases, known as quantitative easing, after it purchased $2.3 trillion of debt in two rounds known as QE1 and QE2. The Fed also pledged to keep borrowing costs low until late 2014.
Australia’s dollar declined 0.9 percent today to $1.0563, after rising 1.7 percent last week. New Zealand’s currency fell 0.8 percent to 81.86 U.S. cents.
Implied volatility of three-month options of Group of Seven currencies rose to 10.4 percent today, after touching 10.06 on Jan. 23, the lowest since March 2011, according to the JPMorgan G7 Volatility Index (JPMVXYG7).
A decrease in the index makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits. Key central bank interest rates are 4.25 percent in Australia and 2.5 percent in New Zealand, compared with near-zero rates in the U.S. and Japan.
The yen and the dollar both appreciated 0.5 percent today, the best performances among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar has weakened 2.1 percent this month and the yen has declined 1.7 percent, according to the indexes.
-- With assistance from Jiyeun Lee in Seoul. Editors: Mark McCord, Nicholas Reynolds
To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
