Tags: euro | crisis

Euro Drops Amid Bets European Crisis Is Worsening

Wednesday, 04 January 2012 04:41 PM

The euro fell from almost a one-week high versus the dollar as European inflation slowed and Italy’s biggest bank said it needs to raise more capital, fueling bets Europe’s debt crisis is worsening.

The 17-nation currency dropped toward an 11-year low against the yen as a 7.5 billion-euro ($9.7 billion) share offer from UniCredit SpA spurred concern European banks may struggle to raise more capital. The euro slid versus most major peers after El Pais newspaper said the Spanish government helped the Valencia region make an overdue payment to Deutsche Bank AG. The pound climbed to a 15-month high versus the shared currency.

“Sentiment overall in the euro is still pretty negative,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “It does look as if Spain could be the problem child for Europe in the months ahead.”

The euro fell 0.8 percent to $1.2942 at 4:04 p.m. in New York after rising to $1.3077 yesterday, the highest level since Dec. 28. The common currency depreciated 0.9 percent to 99.29 yen. It dropped to 98.66 yen on Jan. 2, the weakest since December 2000. The dollar was little changed at 76.72 yen.

Europe’s shared currency slid 5.6 percent over the past six months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes, as investors sought safety amid the region’s turmoil. The dollar rose 7 percent and the yen climbed 12 percent.

Pound Gains

Sterling advanced today to 82.65 pence per euro, the strongest level since September 2010, before trading at 82.87 pence, up 0.6 percent. The pound slipped 0.2 percent to $1.5617.

Hungary’s forint fell to a record versus the euro on bets financial-aid talks will be delayed.

European inflation slowed to 2.8 percent for December from a three-year high of 3 percent the prior month, the European Union statistics office said. A euro-area composite index from Markit Economics based on a survey of purchasing managers in services and manufacturing stayed below the 50 level that divides contraction and expansion for a fourth month.

Milan-based UniCredit said will sell shares at a 43 percent discount from Tuesday’s closing price, excluding the value of rights. That exceeds the 30 percent discount from Commerzbank AG on its 5.3 billion-euro rights offer last May and the 39 percent when HSBC Holdings Plc raised about $17.7 billion in March 2009.

Biggest Loser

The Swiss franc was the biggest loser against the dollar among its 16 major counterparts tracked by Bloomberg. It dropped 1 percent to 94.14 centimes per dollar and fell 0.2 percent to 1.2187 per euro.

The euro may depreciate to parity with the dollar if one or more countries exit the monetary union, said Adam Myers, a senior foreign-exchange strategist in London at Credit Agricole SA. He said he expects it to drop first to $1.25 as the current turmoil intensifies.

“Now we’ll see momentum pick up, and we’ll see the euro start to fall more aggressively,” Myers said in an interview with Andrea Catherwood on Bloomberg Television’s “Last Word.”

The shared currency may weaken to $1.20 by year-end as the European Central Bank cuts interest rates, according to Paul Robinson, global head of foreign-exchange research at Barclays Plc in London. The ECB may lower its 1 percent refinancing rate to 0.5 percent this quarter, Robinson said in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee.

Speculation on Spain

Spain’s Treasury gave a verbal guarantee to an unidentified lender persuading it to advance the funds the Valencia government needed to make a 123 million-euro payment, El Pais said, citing people it didn’t identify at the national economy ministry and the regional economy department.

The euro also weakened amid speculation Spanish Prime Minister Mariano Rajoy’s government may apply for loans from the EU’s rescue fund and the International Monetary Fund, the Spanish newspaper Expansion reported, citing unidentified people with knowledge of the matter. The country’s deputy minister for communication, Carmen Martinez Castro, said in a phone interview there are no plans to seek external aid.

Demand at a German auction of 10-year bonds was lower than the average over the past five years. Germany sold 4.06 billion euros of 2 percent debt due in January 2022 at an average yield of 1.93 percent. Investors bid for 1.27 times the amount allotted, versus a five-year average bid-to-cover ratio of 1.6.

“If we get some very weak auctions through the course of the month, it puts a lot of pressure on the EU and its summit right at the end of the month,” said Neil Mellor, a strategist at Bank of New York Mellon Corp., by phone from London. “It does point to a positive dollar view.”

EU leaders will meet Jan. 30 to discuss jobs and growth.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six major trading partners, increased 0.5 percent to 80.085.

Orders to U.S. factories rose in November by the most in four months, the Commerce Department said today, showing gains in manufacturing will help the world’s biggest economy grow. Bookings rose 1.8 percent after a revised 0.2 percent drop the prior month, the data showed.

Hungary’s forint dropped for a second day against the euro on concern a resumption in talks with the IMF and the EU on financial assistance will be delayed. It retreated 1.3 percent to 320.46 per euro after touching a record low 321.68.

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