BLBG:Euro Weakens Toward Decade Low Against Yen as Italy’s Borrowing Costs Rise
The euro fell toward its weakest level in a decade against the yen on speculation Greece is nearing default and as Italy’s borrowing costs rose at a sale of 3.9 billion euros ($5.3 billion) of bonds.
The 17-nation currency reversed yesterday’s gain versus the dollar amid uncertainty China will buy Italian assets. The Norwegian krone fell for a third day against the euro after the Nordic nation’s 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 0.5 percent to 105.07 yen at 6:28 a.m. in New York, after sliding to 103.90 yesterday, the lowest since June 2001. The shared currency depreciated 0.3 percent to $1.3641. The yen rose 0.3 percent to 77.00 per dollar.
Italy’s 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 Europe’s third-largest 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.”
The cost of insuring against default on European sovereign and bank debt rose to records on mounting concern a default by Greece will trigger losses for banks holding the nation’s bonds, according to CMA. Credit-default swaps signal a 98 percent probability of default.
ECB Rates
CMA, which is owned by CME Group Inc. and compiles prices from dealers in the credit-swaps market, cut its recovery assumption on Greece to 38 percent yesterday, on which basis Greece has a 95 percent chance of default.
German Chancellor Angela Merkel said in an interview with the 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.
A Credit Suisse index based on swaps showed traders are betting the ECB 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.
Euro ‘Nerves’
“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 one of its major peers as risk aversion prompted investors to buy the currency as a refuge. It has appreciated 2.9 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 the nation less reliant on foreign capital.
Nordic Currency Declines
The Norwegian currency weakened against all but one of 16 major peers tracked by Bloomberg on bets its central bank 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 shows traders predict the Norges Bank will cut its benchmark rate by 71 basis points over the next year, compared with expectations of a 44-point increase at the start of last month.
Norway’s krone slid to a two-week low of 7.7689 against the euro, later weakening 0.5 percent to 7.7235. It slipped 0.6 percent to 5.6519 per dollar. Sweden’s krona was little changed at 6.6847 per dollar and rose 0.5 percent to 9.1136 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 0.3 percent to 63.40 yen, and was little changed at 82.38 U.S. cents.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
