BLBG:Euro Drops Versus Yen, Dollar as Cyprus Turmoil Roils Markets
The euro dropped to its lowest level this year against the dollar after an unprecedented levy on bank deposits in Cyprus threatened to derail the nation’s bailout and spark a new round in Europe’s debt crisis.
The 17-nation euro declined by the most in three weeks against the yen as investors sought haven assets after Cypriot President Nicos Anastasiades bowed to demands by euro-area finance ministers to raise 5.8 billion euros ($7.5 billion) by taking a piece of every bank account in Cyprus. The yen rose against all 16 major peers after Anastasiades delayed a vote on the measure in parliament until today.
“The concern is that this bailout plan was forced upon deposit holders, taxing them and therefore an involuntary support for the bailout,” said Imre Speizer, a strategist at Westpac Banking Corp. (WBC) in Auckland. “If this is a template for future bailouts then that’s worrying for any of the larger countries if they have to go down this route. It isn’t affecting only the euro, it’s affecting risk appetite in general.”
The euro slid to $1.2889, the least since Dec. 10, before trading at $1.2892 as of 6:05 a.m. in London, down 1.4 percent from the end of last week. It dropped 2.3 percent to 121.70 yen and touched 121.15, the least since March 5. The dollar lost 0.9 percent to 94.40 yen, after touching 93.57, the least since March 6.
Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the 17-member currency bloc since the European Central Bank’s pledge in September to backstop troubled nations’ debt.
‘Credit Negative’
The terms of Cyprus’s bailout are negative for depositors across Europe, and may hurt bank ratings region-wide, Moody’s Investors Service said in its Credit Outlook report today.
“There’s concerns about the dangerous precedent that this sets in terms of other so-called depositors guarantees,” said Annette Beacher, Singapore-based head of Asia-Pacific research at TD Securities Inc. “It’s the de-facto break-up of the euro in the fact that having money in a Cyprus bank isn’t worth as much as having money in any other bank.”
The euro may drop toward its November low of $1.2662 if it falls below so-called support near $1.2887, said Australia & New Zealand Banking Group Ltd., citing chart patterns.
The euro had rallied after approaching $1.2885, the 38.2 percent Fibonacci retracement level of its move from $1.4247 on Oct. 27, 2011, to $1.2043 on July 24. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.
The currency’s 200-day moving average comes in at $1.2873, data compiled by Bloomberg show.
Euro Support
Those levels “will prove some support in the context of how much we’ve moved already,” said Alex Sinton, director for institutional foreign exchange in Auckland at ANZ. “I don’t think we’ll get down there today, through that $1.2872 area, but certainly depending on how this plays out, it may be something to watch.”
The euro is trading about 6.4 percent above $1.2127, its average since being introduced in January 1999, and has been above that level since July 27.
It has risen more than 2 percent against the dollar since ECB President Mario Draghi on Sept. 6 announced an agreement for an unlimited bond-buying program to regain control of interest rates. According to Bloomberg Correlation-Weighted Indexes tracking 10 developed market currencies, the shared currency is up 2 percent over the past six months.
Anticipating gains in haven markets, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said on Twitter that the concern in Cyprus “moves risk-on trade to backseat.” He added: “Sell euro as well.”
Sensitive Markets
Robert Mead, Gross’s colleague at Pimco’s Australia office, said the level of uncertainty in markets has increased.
“Whenever markets are unsure of where they’re going to move next, every data release takes on a much higher degree of importance,” said Mead, the Sydney-based head of portfolio management for Pimco.
Greece sells 1 billion euros of three-month Treasury bills tomorrow. Spain auctions 3- and 9-month bills the same day, followed by 3-, 5- and 10-year debt on March 21. Portugal sells 3- and 18-month paper on March 20 while Italy offers bonds on March 25. A debt crisis that began in Greece in 2009 spread to the region’s so-called periphery economies before being stemmed last year.
“People will be watching the countries that are just returning to debt markets, and it may well cost them a few basis points,” said Hans Kunnen, the Sydney-based chief economist at St. George Bank Ltd. The Cyprus issue has “sent a shiver down the spine of Europe. If Cyprus, why not other nations?”
Cyprus Levy
European Union Economic and Monetary Commissioner Olli Rehn said in a March 16 interview there won’t be a repeat of the tax on bank deposits.
“The issue is whether to believe that the Cyprus levy on depositors is one-off, but depositors and investors elsewhere could easily see this as another in a string of ’one-offs’ and react badly,” Steven Englander, the head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in an e- mailed research note. The developments will lead to selling of the euro against a range of currencies including the dollar, Swiss franc and pound, he wrote.
The euro dropped 0.8 percent to 1.2178 francs and 1.2 percent to 85.48 U.K. pence.
Benchmark Rates
Benchmark rates in Europe are a record-low 0.75 percent while borrowing costs in the U.S. and Japan are close to zero. The Federal Reserve begins a two-day policy tomorrow, the same day a leadership change begins at the Bank of Japan.
Haruhiko Kuroda takes over stewardship of the Japanese central bank on March 20, a day after current Governor Masaaki Shirakawa steps down. Kuroda has said the BOJ will do whatever is needed to end 15 years of deflation, and expressed confidence a 2 percent inflation target is achievable in two years.
The yen has weakened more than 15 percent over the past six months, the biggest drop among 10 currencies on the Bloomberg indexes.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Kevin Buckland in Tokyo at kbuckland1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
