BLBG:Euro Weakens Toward Lowest Since June 2001 Against Yen on Italy Debt Woes
The euro fell toward its weakest in a decade versus the yen on speculation Greece is nearing default and as Italy sold 3.9 billion euros ($5.3 billion) of bonds amid signs the region’s debt crisis is worsening.
The 17-nation euro reversed yesterday’s gain against the dollar amid uncertainty China will buy Italian assets, as borrowing costs in the euro region’s third-largest economy surged. The Norwegian krone weakened for a third day against the euro after interest-rate expectations declined. New Zealand’s dollar dropped against the yen after a report showed manufacturing volumes unexpectedly fell last quarter.
“The Italian story is enough of a headwind for now to continue to keep the euro on the defensive,” said Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. The Chinese have previously “been touted as the saviors of Europe but it seems they are heavily invested already and whether they want to add to those positions is probably a moot point.”
The euro weakened 0.6 percent to 104.96 yen at 10:51 a.m. in London, after sliding to 103.90 yesterday, the lowest since June 2001. The shared currency weakened 0.5 percent to $1.3615. The yen rose 0.2 percent to 77.07 per dollar.
The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond at an average yield of 5.6 percent, compared with 4.93 percent on July 14, the last time securities of a similar maturity were sold. Demand was 1.28 times the amount on offer, compared with a bid-to-cover ratio of 1.93 at the previous sale. The Treasury had aimed to sell a maximum of 4 billion euros.
Italy Debt ‘Hole’
The euro was boosted yesterday after an Italian government official said talks had been held with Chinese counterparts about potential investments in the economy. The purchase of Italian bonds was not the focus of the meetings, which took place in the past few weeks, the official said on condition of anonymity, without specifying which assets may be involved.
“The story itself provided some interest but I don’t think necessarily it turns the tide,” said Stretch. “The problem for Italy is the size of the stock of debt. It’s a pretty big hole and even the Chinese would struggle to fill that one up on an ongoing basis.”
German Chancellor Angela Merkel said in an interview with Berlin-based broadcaster Inforadio she won’t let Greece fall into “uncontrolled insolvency” because the risk of contagion for the other euro-zone countries “is very big.” The so-called troika of the International Monetary Fund, European Central Bank and European Commission representatives will return to Greece this week, Merkel said.
ECB Rates
A Credit Suisse index based on swaps showed traders are betting the European Central Bank will cut its benchmark interest rate by 29 basis points, or 0.29 percentage point, over the next 12 months. That compares with a 25-point increase forecast on Aug. 1.
“The nerves around the whole euro system are just so frayed now that it’s difficult to see conditions improving all that much,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “The euro can easily fall significantly further before the year’s out because there’s still scope for policy easing by the ECB.”
The yen strengthened against all but two of its major peers as risk aversion prompted investors to buy the currency as a refuge. It has appreciated 3.1 percent in the past week, the best performer among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes.
The yen tends to appreciate during economic and financial turmoil because Japan’s current-account surplus makes it less reliant on foreign capital.
Nordic Currency Declines
The Norwegian currency weakened against all 16 major peers tracked by Bloomberg and the krona slid for a fourth day against the dollar on bets the nations’ central banks may cut interest rates. The recent strengthening of the krone has increased the probability of lower borrowing costs, Dagens Naeringsliv reported last week, citing DnB NOR ASA’s Chief Executive Officer Rune Bjerke.
A Credit Suisse index based on swaps showed traders are betting the Norges Bank will cut its benchmark rate by 71 basis points over the next 12 months. That compares with a 44-point increase projected on Aug. 1.
“Relative interest rates have been moving significantly against the Swedish krona and Norwegian krone and that has scared a lot of investors out of long positions in these currencies,” said Kasper Kirkegaard, a senior currency strategist at Danske Bank A/S in Copenhagen.
Norway’s krone slid to a two-week low against the euro, dropping 0.6 percent to 7.732. It weakened 1.1 percent to 5.6841 per dollar. Sweden’s krona fell 0.6 percent to 6.7288 against the greenback and was little changed at 9.1514 per euro.
The New Zealand dollar dropped after the government said manufacturing volumes fell 0.7 percent in the second quarter. The median estimate in a Bloomberg News survey was for a 1 percent increase.
The so-called kiwi fell 0.6 percent to 63.18 yen, and declined 0.4 percent to 82.02 U.S. cents.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
