BS: Euro Drops Versus Most Major Peers as Draghi Joins IMF in Alert
The euro declined versus most of its major counterparts as European Central Bank President Mario Draghi said the common-currency bloc faces risks from financial instability.
The yen rose against the 17-nation currency for a second day after the International Monetary Fund said the region’s economy will shrink more than forecast this year. The franc sank 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. Sterling declined versus most major peers as U.K. manufacturing fell more than forecast.
“There’s getting to be more concern about growth in Europe,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “Data we saw overnight, mainly from the U.K., was not really positive. The new forecast from the IMF doesn’t help.”
The euro dropped 0.4 percent to 101.17 yen at 9:57 a.m. New York time. It closed yesterday below its 200-day moving average, 101.77 yen, for the first time in three days. The shared currency weakened 0.4 percent to $1.2916. The yen was little changed at 78.33 per dollar.
The European currency extended losses as German Chancellor Angela Merkel met in Athens with Greek Prime Minister Antonis Samaras. She maintained pressure on Greece to meet austerity pledges, proclaiming her desire to keep the country in the euro.
“It doesn’t seem like we’re getting anything new, that any sort of progress is being made,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview.
‘Cautious’ Market
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.
The ECB president 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. The market will probably “see the euro correct back down a little bit further on the day,” he said.
South Africa’s rand surged against all of its 16 most- traded peers after the nation’s Road Freight Employers Association said three unions with 15,000 workers agreed to end their strike.
The rand had depreciated yesterday versus all of its major counterparts, dropping to the weakest in almost 3 1/2 years against the dollar, as stoppages by the country’s mining and transportation industries spread.
The currency climbed 1.2 percent to 8.7899 per dollar, snapping a four-day drop. It fell to 8.9942 yesterday, the weakest level since April 27, 2009.
Aussie Gains
The Australian dollar rallied from an almost three-month low reached yesterday. The Aussie added 0.3 percent to $1.0219 after touching $1.0149 yesterday, the lowest since July 13.
Implied volatility among major currencies, which signals the expected pace of price swings, slipped three basis points, or 0.03 percentage point, to 7.65 percent, almost the least since 2007. Lower volatility makes investments in currencies with higher key lending rates more attractive because the risk in such trades is that market moves will erase profit. The five- year average is 12.4 percent.
The Swiss currency weakened against most 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.
Negative Rate
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.
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 1.2112 per euro, after earlier sliding to a three-week low of 1.2143. It weakened 0.5 percent to 93.82 centimes per dollar.
Pound Weakens
The pound fell 0.2 percent to $1.6002 before paring the decline to trade at $1.6014. Factory output in the U.K. dropped 1.1 percent in August from July, when it rose 3.1 percent, the Office for National Statistics said today in London. A Bloomberg News survey forecast a decline of 0.7 percent. Overall industrial output decreased 0.5 percent. The goods-trade deficit widened as exports fell.
The European currency region’s economy will contract 0.4 percent this year, 0.1 percentage point less than forecast in July, and grow 0.2 percent in 2013, versus 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, 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 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.
Worst Performances
The euro slid 1.9 percent in the past six months, the worst performance after the Swiss franc’s 2.7 percent drop among the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen gained 4.2 percent, while the dollar declined 0.3 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, rose 0.3 percent to 79.755.
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 announced last month 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.
To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
