‘Game of chicken’ may end in default, GFT’s Lien says
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar index erased its decline Wednesday following reports that European officials are considering ways to delay the next bailout payment to Greece for two months.
During European trading hours, investors moved out of the greenback’s safe haven after the euro-zone economy shrank less than expected in the fourth quarter and China’s top central banker said his nation will increase support for Europe.
The dollar index DXY +0.19% , which tracks the U.S. currency against six rivals, traded at 79.611, off its low around 79.098 and very close to 79.607 from late North American trading on Tuesday.
The euro EURUSD -0.38% rose as high as $1.3190, before reverting to $1.3068, down compared to $1.3094 Tuesday.
The shift followed a Reuters report saying European Union finance officials are considering ways of delaying parts or even all of the second bailout program for Greece while still avoiding a disorderly default. The delay could be until after Greece holds elections, expected in April, according to the news agency.
Without the bailout fund, Greece is unlikely to be able to make a €14.5 billion bond repayment on March 20. Read story on Greece, EU.
“The risk of a default increased after reports from EU sources that euro-zone finance ministers could delay all or part of a Greek bailout until Greece provides the necessary documentation to assure that they will not renege on the deal,” said Kathy Lien, director of currency research at GFT. “Europe and Greece are playing a game of chicken and unfortunately their mutual unwillingness to back down this close to the March 20th deadline means that default may be unavoidable.”
The euro rose towards $1.32 as a preliminary reading of fourth-quarter gross domestic product showed the 17-nation currency bloc shrank 0.3% as a whole compared to the previous quarter. Economists had forecast a 0.4% contraction. Read more about euro-zone GDP.
The euro had weakened on Tuesday after euro-zone finance ministers canceled a planned gathering in Brussels, saying Greece had failed to finalize details of an austerity program that’s a prerequisite for receiving a second bailout. A conference call is set for later Wednesday. Read Tuesday’s story on currencies.
The advance for the European currency early Wednesday followed comments from Zhou Xiaochuan, the People’s Bank of China governor who said he believes the euro zone’s challenges can be solved.
The central bank governor said that he fully supports monetary measures taken by the European Central Bank during the crisis and that China plans to streamline and expand investment in Europe, including the European Financial Stability Facility, which is the euro zone’s bailout mechanism. Read more on PBOC comments.
Ulrich Leuchtmann, strategist at Commerzbank, argued that euro bulls were taking false comfort in Zhou’s remarks, however.
“In our view the positive market reaction to these comments is exaggerated as it is based on a misunderstanding. There is no risk of a lack of buyers for the EFSF bonds — with or without China’s help,” he said, in emailed comments.
“The euro zone as a whole does not require capital imports; its financial account is more or less balanced. Voluntary capital flows into the peripheral countries would be of importance, as these are at a risk of experiencing a sudden stop,” he said. “But the regime in Beijing is understandably only interested in investing in EFSF bonds. This is not really going to solve the crisis.”
U.K. pound, Japanese yen
Also Wednesday, the British pound GBPUSD -0.03% pared gains to $1.5678, up from $1.5661 late in the previous session.
The Bank of England, in its quarterly inflation report, said it expects inflation to continue falling sharply in coming months and projected it to fall below its 2% target for much of the two-year forecasting period.
The report indicated that officials anticipate being on hold until the third quarter of 2014, said David Watt, currency strategist at RBC Capital Markets.
Bank of England Gov. Mervyn King “did not slam the door on more [quantitative easing], nor did he express a heartfelt desire for more,” he said.
The central bank earlier this month further boosted the size of its asset-purchase program, the centerpiece of its quantitative-easing strategy.
However, the U.S. unit reversed a gain against the Japanese yen USDJPY -0.13% to buy ¥78.27, down from ¥78.49 Tuesday.
It’s still well above its ¥77.60 mark Monday, before the Bank of Japan’s surprise move Tuesday to expand its asset-buying program.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is a reporter for MarketWatch in Frankfurt. Sarah Turner in Sydney contributed to this report.
