BLBG:Euro Trades Near 2-Week Low Before Debt Sales, EU Summit
The euro traded 0.3 percent from a two-week low against the dollar amid concern that a European Union summit this week will fail to produce decisive measures to end the currency bloc’s debt crisis.
The 17-nation euro held onto a drop from yesterday versus the pound before Spain and Italy sell debt today as fiscal contagion from Greece risks an increase in borrowing costs to unsustainable levels. Moody’s Investors Service downgraded 28 Spanish banks yesterday, citing the country’s sovereign debt and rising real estate losses. Demand for the U.S. currency as a refuge was supported as Asian stocks extended global losses.
“We expect a disappointing outcome from the EU leaders’ summit, so therefore we think that the euro may weaken into the week’s end,” said Richard Grace, chief currency strategist and head of international economics in Sydney at Commonwealth Bank of Australia (CBA), the nation’s biggest lender. “The U.S. dollar is going to remain quite firm.”
The euro traded at $1.2506 at 12:58 p.m. in Tokyo from $1.2504 at the close in New York yesterday, when it touched $1.2471, the weakest since June 12. It fetched 80.30 U.K. pence from 80.29 pence, following a 0.4 percent decline yesterday. The yen added 0.2 percent to 99.46 per euro and to 79.53 against the dollar.
The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated 3.5 percent against the dollar this year. The MSCI Asia Pacific Index of regional shares slid 0.5 percent today after the Standard & Poor’s 500 Index sank 1.6 percent yesterday.
Debt Sales
Italy is scheduled to sell inflation-linked securities maturing in September 2016 and September 2026 today, along with as much as 3 billion euros ($3.8 billion) of May 2014 zero- coupon notes. Spain will offer three- and six-month bills.
At least a dozen Spanish lenders were lowered to junk status, Moody’s said yesterday in a statement. The ratings company downgraded six banks by four levels and 10 by three grades with the rest getting one- and two-tier declines.
Spain’s 10-year bond yields jumped to more than 7 percent last week, a level that spurred Greece, Ireland and Portugal to seek bailouts. Cyprus yesterday sought a financial lifeline from the euro area’s firewall funds, becoming the fifth of the currency union’s 17 member states to request a bailout.
The two-day EU summit in Brussels starting June 28 is the first meeting of European leaders since Greek parliamentary elections on June 17 that saw victories for pro-bailout parties. France and Italy are urging Germany to take decisive action to end the debt crisis, now in its third year.
’Positive Surprise’
“Because markets are very bearish, a positive surprise out of the European summit is likely to trigger short covering for the euro,” said Noriaki Murao, managing director of the marketing group in New York at the Bank of Tokyo-Mitsubishi UFJ Ltd., referring to a bet that an asset’s price will fall.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 141,066 contracts on June 19, compared a record of 214,418 the week ended June 5, figures from the Washington-based Commodity Futures Trading Commission showed.
The euro has depreciated 2.5 percent this year, making it the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has risen 1.4 percent and the yen has fallen 2.2 percent.
Demand for the yen was subdued as Japanese lower house lawmakers prepare to vote later today on a bill to double the consumption tax. Prime Minister Yoshihiko Noda is struggling to overcome resistance within the ruling Democratic Party of Japan for the increase, which he has said is necessary to control the nation’s record debt and ballooning welfare costs.
Japan’s Debt
Both the International Monetary Fund and the Organization for Economic Cooperation and Development have urged Japan to tackle its debt more aggressively. Fitch Ratings last month cited Japan’s “leisurely” approach to shoring up its finances when it cut the country’s sovereign rating.
The risk of political uncertainty stemming from the tax bill may add to selling pressure for the yen, Masafumi Yamamoto, chief currency strategist in Tokyo at Barclays Plc in Tokyo, wrote in a note to clients today.
“The passage of the bill doesn’t mean there will be no chance of sovereign downgrade in the future,” according to the report.
To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
