The euro fell to a six-month low versus the dollar and the yen rallied as Germany prepared plans to shore up the nation’s banks with credit-default swaps showing a more than 90 percent probability that Greece won’t meet its debt commitments. The yen strengthened against the dollar and the euro, erasing earlier losses, as investors sought the Japanese currency as an alternative to the U.S. currency, even as Greek officials said no announcements were planned. The 17-nation euro weakened amid speculation the region’s central bank will dilute a proposal to wean distressed banks off its emergency funding, said a euro-area official familiar with the deliberations. The Dollar Index headed for the biggest weekly gain since May 2010 after President Barack Obama detailed his $447 billion plan to boost hiring. “There is a lot of chatter right now that Greece may default over the weekend,” said Charles St-Arnaud, a foreign- exchange strategist at Nomura Holdings Inc. in New York. “A lot of investors are reducing their exposure and trying to find cover in case something happens over the weekend.” The euro depreciated 1.8 percent to $1.3630 at 12:37 p.m. in New York, after dropping to $1.3627, the lowest level since Feb. 22. The currency has slumped 4 percent this week, the most since the period ended August 2010. The yen strengthened 0.2 percent to 77.39 per dollar after weakening as much as 0.5 percent. The yen rose 1.9 percent to 105.46 per euro, touching the strongest level since January 2001. Dollar Rallies The Dollar Index, which tracks the greenback versus the currencies of six U.S. trading partners, gained for a second day, adding 1.3 percent to 77.115. It earlier reached 77.276, the highest level since March 11. The gauge headed for a 3.2 percent weekly gain, the most since the period ended May 11, 2010. “The story is simply that the dollar is picking up a bit because there are very few places where you can run and hide,” said Sebastien Galy, a senior currency strategist at Societe Generale SA in London. “You’re not getting any yield in Europe. It does suggest more dollar demand.” Axel Merk, president and chief investment officer at Merk Investments LLC, said his firm sold $90 million of euros yesterday after European Central Bank President Jean-Claude Trichet took a “more dovish tone.” Euro Sale Merk Investments manages more than $700 million in assets and runs the Merk Hard Currency Fund. Merk disclosed the sale in a note today. The European Central Bank left its benchmark rate at 1.5 percent yesterday and cut its 2011 and 2012 growth forecasts at a policy meeting in Frankfurt. Greek bond yields reached record highs as the country endeavors to show it can reach budget-cutting targets to receive financial aid. Credit-default swaps insuring Greek sovereign bonds jumped 212 basis points to a record 3,238, according to CMA. Greece has no plans to publish details of anticipated participation in its debt-swap program this week or next, said Petros Christodoulou, head of the country’s debt management office. The response so far has been “very positive,” he said in a telephone interview. “There will not be a number coming out of Athens today or next week. At this moment, more than half of the Europeans have not even responded. It is too early.” Swap Program The nation is seeking preliminary responses today from bond investors to the proposed debt swap, part of a 159 billion euro ($218 billion) European Union rescue plan agreed upon in July. The implied yield on Euribor futures for June slid four basis points to 0.98 percent, showing traders were adding to wagers for lower borrowing costs. Investors should be “on alert” for a potential 50 basis-point cut in ECB rates, Barclays Plc economists Julian Callow and Francois Cabau wrote in an investor report yesterday. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, fell 7.1 basis points to 66.3 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback, according to data compiled by Bloomberg. Down Move “The catalyst has been the dovish stance from the ECB yesterday, which has continued to reinforce the downward move in the euro across the board as yield spreads are starting to move against it,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubihsi UFJ Ltd. in London. “Given the ongoing problems in the euro zone debt markets, there’s not much to like about the euro.” The euro headed for a weekly decline of 0.9 percent against nine developed nation currencies, according to the Bloomberg Correlation-Weighted Indexes. The Swiss franc declined 9.2 percent this week and the New Zealand dollar fell 0.3 percent. The cost of insuring against default on European financial and sovereign debt rose to records amid speculation bailout funding to Greece may be withheld. Ilias Mosialos, a Greek government spokesman, said the payment of a sixth loan tranche under a European Union and International Monetary Fund bailout agreed in May of last year isn’t at risk. Greek Review “Whenever there are things like ‘Greece is not doing enough’ is said, that is when people get the most scared because of a possibility they may not get the next tranche of aid,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Periphery concern has continued to be the overarching theme.” Instead of imposing higher interest rates on emergency loans to penalize Greek, Irish and Portuguese banks, the ECB and national central banks would ask financial institutions to detail how they will repay the money, the euro-area official said. The seven-day relative strength index for the gauge reached 78.16, trading above the 70 level for the second day. A reading above 70 signals an asset may have risen too quickly and may be due for a reversal. The euro’s seven-day relative strength fell below 30 for the second day signaling it may have declined too fast and may reverse. South Africa’s rand was the biggest loser against the dollar, falling as much as 1.7 percent to 7.2985, the weakest since Aug. 11, before trading at 7.2873. The Standard & Poor’s 500 Index declined 1.2 percent and the S&P GSCI Index of raw materials slumped 1.7 percent. Demand for the yen was tempered before finance ministers from the Group of Seven nations meet today in Marseille, France, to discuss ways to bolster their economies. Japanese Finance Minister Jun Azumi said before departing from Tokyo that he would appeal to the group to appreciate his concern about excessive yen gains. Japan has intervened in the currency markets three times in the past 12 months to weaken the yen, with the last operation being a 4.51 trillion-yen action in August, the largest monthly amount since March 2004. The yen went on to reach 75.95 per dollar on Aug. 19, a postwar record. To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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