BLBG:Euro Weakens Against Dollar as Draghi Joins IMF in Growth Alert
The euro dropped against the dollar and yen, reversing earlier gains, as European Central Bank President Mario Draghi said the common-currency region faces risks from financial instability.
The euro depreciated against all but three of 16 major peers tracked by Bloomberg after the International Monetary Fund said the region’s economy will shrink more than forecast this year. The franc weakened the most since Sept. 13 against the euro after two of the world’s biggest custody banks said they will charge depositors to hold the Swiss currency and the Danish krone. Draghi spoke to lawmakers at the European Parliament in Brussels.
Draghi is “discussing some of the risks still out there, which is making the market a little bit cautious at the moment,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “As far as the global picture is concerned, we’ve seen the downward revisions to global growth from the IMF. That is going to likely see the euro correct back down a little bit further on the day.”
The euro dropped 0.3 percent to 101.33 yen at 7:38 a.m. New York time. It weakened 0.1 percent to $1.2952. The yen gained 0.1 percent to 78.23 per dollar.
Draghi told the European Parliament in Brussels that there is no alternative to austerity as euro-area officials are pushing debt-strapped nations across southern Europe for more cuts despite the risk that they will deepen economic recessions gripping the region.
IMF Report
The 17-country euro-area economy will contract 0.4 percent this year, 0.1 percentage point less than forecast in July, and grow 0.2 percent in 2013, compared with 0.7 percent predicted three months ago, the Washington-based IMF said in a report.
The world economy will grow 3.3 percent this year, the slowest pace since the 2009 recession and compared with the July forecast of 3.5 percent, the IMF said. The risk of a steeper global slowdown is “alarmingly high,” the fund said.
The euro slid as finance ministers from all 27 nations in the European Union convene in Luxembourg today.
IMF Chief Economist Olivier Blanchard said at a press conference in Tokyo today that yields on Spanish and Italian bonds, which fell after the ECB announced plans to buy government debt, could rise if the countries don’t request bailouts.
Euro Weakness
The European common currency slid 1.8 percent in the past six months, the second-worst performance after the Swiss franc among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen gained 4.1 percent, while the dollar declined 0.5 percent.
The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners including the euro and the yen, climbed 0.2 percent to 79.673.
The Swiss currency weakened against all but one of its 16 major peers after State Street Corp. (STT) and Bank of New York Mellon Corp. (BK) said they will charge depositors to hold Danish krone and francs as customers seek refuge from the crisis-stricken euro.
State Street will apply a negative interest rate of 0.75 percent annually to krone deposits starting Nov. 1, with a separate charge for francs, according to a note to clients last week. That means money managers, insurance companies and pension funds must pay the bank to hold their cash.
Swiss Penalty
BNY Mellon started charging for krone deposits last month, a person with knowledge of the matter said. The lender isn’t charging for francs.
The move is unlikely to have a lasting effect on the franc “given that interest rates have been negative in the interbank market for months,” Gareth Berry, a foreign-exchange strategist at UBS AG in Singapore wrote in a note. “Those who wish to hold Swiss franc deposits for safe-haven reasons are unlikely to be deterred by a 25 basis-point penalty.”
The franc declined less than 0.1 percent to 1.21103 per euro, after earlier sliding to a three-week low of 1.21430. It slipped 0.3 percent to 93.58 centimes per dollar.
South Africa’s rand surged more than 1 percent against all of its 16 major peers after the nation’s Road Freight Employers Association said three unions with 15,000 workers agreed to end their strike.
Rand Strengthens
The rand dropped to the weakest in almost 3 1/2 years against the dollar yesterday as stoppages by the country’s mining and transportation industries spread.
The currency climbed 1.7 percent to 8.7465 per dollar, snapping a four-day drop. It fell to 8.9942 yesterday, the weakest level since April 27, 2009.
The world’s most-accurate foreign-exchange strategists say the dollar will strengthen even as the Federal Reserve debases it, unlike the previous two rounds of economic stimulus, when cash injections weakened the currency.
Fed Chairman Ben S. Bernanke’s $40 billion-a-month of bond purchases will leave a stronger currency in 2013, say 9 of the 10 forecasters with the lowest margins of error in the six quarters ended Sept. 28 as measured by Bloomberg. Wells Fargo & Co. and Westpac Banking Corp. (WBC), which tied for most-accurate, expect little damage from efforts to stimulate the economy and the so-called fiscal cliff of spending cuts and tax increases scheduled for next year.
Reserve Currency
While the Dollar Index, which measures the currency against those of six major trading partners, fell 4.6 percent and 3.9 percent in the first two rounds of Fed stimulus that added $2.3 trillion to the banking system, this time will be different, forecasters say. Investors will demand the world’s reserve currency as U.S. growth outpaces its developed counterparts.
“If the U.S. economy keeps outperforming, then it shouldn’t cause the U.S. dollar much damage,” given that most of its trading partners are growing slowly or contracting, said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. Monetary easing is only “a short-term negative for the U.S. dollar.”
Westpac, which matched Wells Fargo with a 3.34 percent margin of error in the Bloomberg analysis, expects the dollar to rally to $1.20 versus the euro by the third quarter of next year, from $1.3045 at the end of last week, and advance to 80 yen from 78.67.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
