SF: Euro Falls Against Higher Yielders on Renewed Growth Concern
May 24 (Bloomberg) -- The euro fell against the South African rand and Russian ruble as investors sold the 16-nation currency to fund trades in higher-yielding currencies.
The euro also weakened for the first time in four days versus the dollar after the Bank of Spain took over a failing regional lender. The pound strengthened as the U.K. announced $9 billion of spending cuts to fight the budget deficit. The Dollar Index snapped a three-day decline. Yuan forwards rose the most in four days as President Hu Jintao said China will move gradually and independently in making changes to its exchange- rate mechanism.
"Europe's problems are keeping the euro under pressure, increasing its attractiveness as a funding currency," said Ian Stannard, a senior foreign-exchange strategist at BNP Paribas SA in London.
The euro fell 1.2 percent to $1.2420 as of 10.40 a.m. in London. It dropped 1.3 percent to 9.7493 rand and 1.2 percent to 38.5589 rubles. The yen strengthened to 0.9 percent to 112.07 per euro and fell 0.3 percent to 90.27 per dollar.
The euro weakened versus all 16 of major counterparts after the Bank of Spain said on May 22 it appointed a provisional administrator to run CajaSur, a savings bank crippled by property-loan defaults. The lender, based in the city of Cordoba, Spain, and controlled by the Roman Catholic Church, will be run by the government's bank restructuring fund, the regulator said.
"Weekend revelations that the Bank of Spain has acted to support a regional lender are likely to weigh on the euro," Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a research note. "This will probably revive concerns about the broader stability of the euro-zone banking system."
Euro Funding Currency
Europe's currency has lost 6.5 percent this year, based on Bloomberg Correlation-Weighted Indexes. The dollar has risen 9.3 percent, and the yen has advanced 13 percent.
The fastest convergence in short-term interest rates in almost a year is making the euro an addition to currencies used to finance investments in higher-yielding assets.
"The hot guys are moving into using the euro as a funding currency," said John Taylor, who helps oversee $7.5 billion as chairman of New York-based FX Concepts LLC, manager of the world's largest foreign-exchange hedge fund. "It's not quite as cheap as the yen but it's a lot safer in a crisis, because the worse the world looks the worse the euro looks."
Borrowing in euros to finance an investment in the Australian dollar, New Zealand dollar, Brazilian real and Norwegian krone returned 10 percent in the past 6 months, according to data compiled by Bloomberg. The same trade using the dollar instead of the 16-nation currency resulted in a 7.5 percent loss, and a 7.4 percent decline with the yen.
Yuan Forwards
Yuan forwards traded near their weakest level in eight months after Hu, 67, said as talks with the U.S. opened in Beijing today that China will continue to "steadily advance" reform "under the principles of independent decision-making, controllability and gradual progress."
China may revalue its currency against the dollar within the next three or four months after the decline in the euro delayed the adjustment, according to Deutsche Bank AG.
"The euro-yuan exchange rate has moved so much, and Europe is a larger trade partner than the U.S., so if they were to revalue against the dollar then you'd see much broader-based yuan strength, which would harm them to some extent," Bilal Hafeez, chief currency strategist at Deutsche Bank in London, said in a Bloomberg Television interview today. "That has delayed the timing they were thinking of."
Weakest Since September
Non-deliverable 12-month yuan forwards strengthened 0.3 percent to 6.7195, while the yuan was little changed at 6.8287. The forwards traded at to 6.7750 on May 20, the weakest since September last year.
The pound strengthened 0.9 percent versus the euro as U.K. Chancellor of the Exchequer George Osborne unveiled 6.25 billion pounds ($9 billion) of spending reductions to tackle a budget deficit that is the biggest in the Group of Seven nations. Concern that Britain will struggle to cut the shortfall has contributed to a 3.6 percent decline in the pound this year, according to Bloomberg Correlation-Weighted Indexes.
"The market's giving the new government a reasonable stay of execution, wanting to see how definitive they are in the budget-deficit stakes," said Jeremy Stretch, a senior currency strategist at Rabobank International in London. "The 6 billion pounds of cuts today are a step in the right direction. For now, markets are cautiously rewarding sterling."
The pound appreciated to 86.16 pence per euro and was little changed at $1.4438.
Dollar Index
The Dollar Index rose for the first time in four days before U.S. reports forecast to show the housing market is improving and consumers turned the most optimistic in 20 months.
U.S. existing home sales rose to an annual rate of 5.65 million in April, from 5.35 million in March, according to a Bloomberg survey before the National Association of Realtors report today. The Conference Board's confidence index climbed to 59 this month from 57.9 in April, according to another survey before tomorrow's data. That would be the highest since September 2008.
"The U.S. is experiencing a V-shaped recovery," said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. "Against this backdrop, the greenback is likely to be supported."
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, gained 1 percent to 86.205.
--With assistance from Ron Harui in Singapore, John Brinsley in Tokyo and Bomi Lim in Seoul. Editors: Justin Carrigan, Rocky Swift
