Euro Set for Worst Week Since January Amid EU Split on Greece

By Keith Jenkins and Ron Harui

March 19 (Bloomberg) -- The euro headed for its biggest weekly decline against the dollar since January as concern Greece will fail to secure financial assistance from the European Union damped demand for the currency.

The euro fell this week against all but one of its 16 major peers as Greece set a one-week deadline for an aid mechanism from the EU, while German officials said the International Monetary Fund is the preferred option. The Swiss franc rose against the euro for a sixth straight day, its longest run of gains since December 2008. The pound dropped against all 16 most-traded currencies after Bank of England policy maker Andrew Sentance said Britain may return to recession.

“The euro remains under pressure,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The main problem is the uncertainty over whether Greece will be able at acquire short-term financing, and that issue is unresolved.”

The euro weakened to $1.3574 as of 10:20 a.m. in London, from $1.3608 yesterday in New York. The currency has lost 1.4 percent versus the dollar this week, the most since the five days through Jan. 29. The 16-nation currency was at 122.82 yen, from 122.99 yen. The yen was at 90.49 per dollar, from 90.39.
The euro will remain weak through 2011, bottoming at $1.19 in the middle of the year as fiscal tightening curbs euro-region inflation and the European Central Bank holds off from raising interest rates, according to BNP Paribas SA.

BNP Paribas Forecasts 

The common currency will trade at $1.22 by the end of March, 2011, at $1.19 by the end of June the same year and at $1.21 by the end of December, BNP analysts led by London-based Hans-Guenter Redeker wrote in a note today, cutting their forecasts. The bank’s previous predictions for the euro were $1.30, $1.32 and $1.36, respectively.

Greek Prime Minister George Papandreou said yesterday he may turn to the IMF to overcome his nation’s debt crisis unless EU leaders agree to set up a lending facility at a March 25-26 summit. French President Nicolas Sarkozy and European Central Bank President Jean-Claude Trichet dismissed the IMF option, saying it would show the EU can’t solve its own crises.

German Chancellor Angela Merkel told parliament on March 17 the IMF may be the only answer to Greece’s fiscal problems. Greece needs to raise about 10 billion euros to refinance bonds due on April 20 and May 19. Papandreou said the nation can’t afford to keep paying current market rates.

‘Haunt the Euro’

“The Greek story is far from over and will continue to haunt the euro,” Geoffrey Yu, a foreign-exchange strategist at UBS AG in London, wrote in a report today. “For the euro, weakness will persist, making us very comfortable with our three-month target of $1.30.”

European equity funds posted net outflows of $1.06 billion in the week ended March 17, the biggest withdrawals since May 2009, EPFR Global said today in a statement.

The Swiss franc strengthened 1.4 percent against the euro this week, its biggest five-day gain since December 2008. Swiss National Bank Governing Board member Jean-Pierre Danthine said yesterday policy makers can’t keep borrowing costs near zero for an extended period of time and maintain purchases of foreign currencies indefinitely.

The SNB, led by Philipp Hildebrand, has sold francs over the past year to combat the threat of deflation and support an export-led recovery. The franc advanced 0.5 percent today to 1.4319 per euro, the strongest level since October 2008.

Pound’s Decline 

The pound dropped for a second day against the dollar and snapped three days of gains versus the euro after Sentance told CNBC that there’s “some risk of a double-dip recession” and that the country will need a “substantial” fiscal tightening. Bank of England policy makers voted unanimously to hold their bond buying program at 200 billion pounds ($303 billion), minutes of a policy meeting showed this week.

“Sentance’s comments are going to be a driver,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “They are a reminder to foreign-exchange markets that it’s not going to be a smooth ride to recovery for the U.K. The BOE remains on the dovish side and there’s no risk of them raising rates. That should keep sterling on the backburner.”

The pound dropped 0.6 percent to $1.5143 and 0.4 percent to 89.62 pence per euro.

Kiwi Leads 

New Zealand’s dollar led gains this week against the U.S. currency before a report forecast to show its economy grew the most since December 2007. The currency, called the kiwi, headed for its biggest weekly gain since December versus Australia’s dollar. The kiwi has appreciated 1 percent since March 12, trading today at 1.2926 per Australian dollar. The New Zealand economy expanded 0.8 percent last quarter, the fastest since the last quarter of 2007, according to a Bloomberg survey before the March 25 report.

The Reserve Bank of New Zealand will raise its target rate by 169 basis points over the next year, compared with 117 points in Australia, according to Credit Suisse Group AG indexes based on swaps trading.

The yen fell versus 10 of its 16 major counterparts as demand the currency as a haven waned after Lloyds Banking Group Plc, the mortgage lender bailed out by the British government, said it expects to return to profit this year. The MSCI World Index of stocks rose 0.2 percent.

“Equities are gradually rising, underpinning risk-taking sentiment,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. “Worries over the outlook for the worldwide rebound seem to be easing. The bias is for the yen to be sold.”

Japanese Prime Minister Yukio Hatoyama considered a redenomination of the yen when he took office in September, the Nikkei newspaper reported, citing a person close to Hatoyama. The change would have involved cutting one or two zeros from the currency, the report said.

Redenomination was considered “as one of the measures to encourage some domestic demand,” said Susumu Kato, Tokyo-based chief Japan economist at Credit Agricole Securities Asia. “Although the economic effect of redenomination is not clear, Mr. Hatoyama considered it worthwhile to discuss.”

To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: March 19, 2010 06:44 EDT