Euro Weakens on Concern Ministers’ Actions Won’t Contain Crisis

The euro fell after European finance ministers help a meeting in Poland and ruled out efforts to pro the region's economy and giving no indication of providing more support for lenders. The problems in the euro zone are not being properly solved and therefore will remain.

By Catarina Saraiva and Lucy Meakin
Sep 16, 2011 2:08 PM MT
Bloomberg

The euro fell, halting a two-day gain versus the dollar, after European finance ministers meeting in Poland ruled out efforts to prop up the region’s economy and gave no indication of providing added support for lenders.

The 17-nation currency pared its first weekly advance this month versus the greenback as European finance ministers meeting in Wroclaw, Poland ruled out efforts to prop up the faltering economy and raised issues of collateral demanded to take part in another Greek bailout at a meeting today. The Dollar Index rose for the first time in four days after a report showed consumer confidence rose more than forecast this month. Sweden’s krona and Norway’s krone fell as volatility deterred investors.

“Nothing encouraging will come out of the finance ministers’ meeting,” said Kathy Lien, director of currency research with online trading firm GFT Forex in New York. “A lot of the initiatives that we have seen from the European leaders, including the solidarity that they’re trying to show for Greece, don’t really hit at the problem. The market is pretty realistic in pricing in a Greek default.”

The euro weakened 0.6 percent to $1.3796 at 5 p.m. in New York, paring its weekly advance to 1 percent. The shared currency depreciated 0.5 percent to 105.95 yen. The dollar added 0.1 percent to 76.80 yen.

Month’s View

The greenback has appreciated 3.1 percent in the past month, the best performance after the Canadian dollar’s 3.6 percent gain among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has fallen 1.7 percent.

Futures traders increased bets that the euro will fall against the dollar to the most in more than a year.

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 -- the so-called net shorts -- was 54,459 on Sept. 13, the most since July 2010, according to the Commodity Futures Trading Commission.

The yen extended declines against the dollar after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 57.8 this month from 55.7 in August, which was the lowest level since November 2008. The median estimate of economists surveyed by Bloomberg News called for a reading of 57.

Dollar Path

The Dollar Index, which measures the greenback against the currencies of six major U.S. trading partners, trimmed a weekly decline as concern the world’s largest economies are slowing fuels demand for the safest assets. The Dollar Index gained 0.4 percent to 76.554, paring this week’s loss to 0.8 percent.

The Swedish krona weakened against most of its major counterparts, and Norway’s krone dropped, on speculation rising volatility in financial markets is deterring investors from taking positions in the currencies. Implied volatility among currencies of the Group of Seven nations traded at 13 today, above its average of 11.5 this year, according to a JPMorgan Chase & Co. Index.

“The liquidity issue with respect to the krone and the krona always means that buying those currencies is a dangerous thing,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “You can see very violent moves because of the lack of liquidity.”

The krona fell 0.5 percent to 6.6152 per dollar, and the krone slid 0.1 percent to 5.5738.

Kiwi Rises

New Zealand’s dollar rose the most among the major currencies, strengthening 0.6 percent to 82.91 U.S. cents.

South Africa’s rand was one of the worst-performing currencies. Its central bank meets next week as unemployment and inflation remain high. The rand fell 1.3 percent to 7.4915 per dollar.

European finance ministers gave no indication today of fresh aid for lenders to go along with yesterday’s liquidity lifeline from the European Central Bank. The finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.

Before today’s meeting, ECB President Jean-Claude Trichet pressed euro-area governments to take decisive action at today’s meeting to halt the crisis and show “unity of purpose.” Finland’s Finance Minister Jutta Urpilainen said it was unlikely an agreement on collateral would be reached at the gathering Poland.

Loan Backing

“We’re going to negotiate about it, but unfortunately I don’t see that we can find a solution” today, Finland’s Urpilainen told reporters before the meeting, which is also being attended by U.S. Treasury Secretary Timothy Geithner.

Risk aversion and the euro is reacting to the continuing disagreements among the euro area on what needs to be done and these appear to be quite large,” said Aroop Chatterjee, a currency strategist in New York at Barclays Plc. “The collateral demands that have been raised by certain countries is a sticking point for the release of additional funds to Greece. If these demands are withdrawn, that would be a positive.”

The euro jumped the most in a month yesterday after the ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure lenders have enough of the currency through the end of the year.

Loan Costs

The cost for European banks to fund in dollars rose today after dropping yesterday, signaling that investors view policy makers’ offer of unlimited loans in the currency as a short-term fix that doesn’t address the euro region’s underlying problems.

The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 85.4 basis points below the euro interbank offered rate, from 81.9 basis points yesterday.

Canada’s dollar is poised to outperform every major currency this week, rising along with the yen and franc, as investors sought haven assets to protect from euro zone problems. Canada has a smaller budget-deficit ratio, lower jobless rate and faster growth than most of its Group of Seven peers.

The loonie, as the currency is known, rose 0.6 percent to 97.81 cents per U.S. dollar.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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