Euro Trades Near 10-Month Low Before EU Meeting; Yen Advances

By Keith Jenkins and Yasuhiko Seki

March 25 (Bloomberg) -- The euro traded near a 10-month low against the dollar on concern a meeting of European Union leaders starting today will fail to make any progress on a financial aid plan for Greece.

The 16-nation currency fell versus 10 of its 16 major peers after Michael Meister, a spokesman for Germany’s ruling Christian Democratic Union party, told French daily Les Echos that only the International Monetary Fund can help Greece. The yen rose from a 10-week low against the dollar on speculation Japanese exporters took advantage of the currency’s biggest slide since December to bring home funds before the nation’s fiscal year ends next week. The Dollar Index climbed to a 10- month high.

“It’s highly unlikely that anything is announced at the EU meeting today,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London who forecasts the euro will slip to $1.30 in the coming months. “The meeting is likely to be disappointing for financial markets and the euro specifically.”

The euro was at $1.3322 as of 8:05 a.m. in London from $1.3315 in New York yesterday after earlier falling to $1.3284, the weakest since May 7. The common currency slid to 122.43 yen from 122.89. The yen appreciated to 91.90 per dollar from 92.30 yesterday, when it fell to 92.40, the lowest since Jan. 12.

Rapid aid for Greece from European countries would destabilize the euro area in the long term, Les Echos quoted Meister as saying. Meister said that he supports the creation of a European monetary fund to handle such problems in the future, the paper reported.

‘Detrimental’ to Stability

An appeal to the Washington-based IMF would be “detrimental to the stability” of the euro because it would show Europe is unable to keep its own house in order, European Central Bank Executive Board member Lorenzo Bini Smaghi said, according to a report yesterday in Germany’s Die Zeit newspaper.

Goldman Sachs Group Inc. exited a bet the euro would strengthen against the dollar after the trade lost 2.8 percent.

“We have clearly underestimated the impact on the euro from the European sovereign crisis and perhaps also from the broader macro adjustment that it portends,” five analysts including Thomas Stolper, London-based economist at Goldman Sachs, wrote in an e-mail to Bloomberg today. “These political headwinds currently matter far more for the euro than the cyclical factors.”

The euro was near a record low against the Swiss franc after Fitch Ratings yesterday cut Portugal’s credit rating, fueling speculation that other European nations will face similar downgrades as the Greek crisis spreads.

The single currency was at 1.4271 francs from 1.4285, after falling yesterday as low as 1.4233.

Fitch lowered Portugal’s credit rating by one step to AA- with a “negative” outlook. The nation’s gross domestic product is “significantly below” what is typical for an AA country, Fitch said.

Japanese Exporters

The yen gained versus 14 of its 16 major counterparts as Japanese exporters bought the currency to hedge their sales generated outside Japan.

“With the dollar-yen having risen to more than a one-month high, exporters probably want to buy the yen aggressively,” said Yoh Nihei, trading group manager at Tokai Tokyo Securities Co. in Tokyo. “There’s talk of actual demand from exporters.”

Japan’s large manufacturers expect the currency to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s Tankan survey.

Losses in the dollar were tempered as yields on U.S. government debt increased on speculation the improving economy will allow the Federal Reserve to end stimulus measures before its major counterparts. The 10-year Treasury yield surged 17 basis points yesterday, the most in nine months. It fell 3 basis points today.

The Dollar Index gained as much as 0.3 percent to 82.062, the highest since May 20, before slipping to 81.809, before reports that may add to evidence the U.S. recovery is gaining pace.

U.S. first-time jobless applications dropped by 7,000 to 450,000 in the week ended March 21, according to a Bloomberg News survey of 43 economists. The data is scheduled for release at 8:30 a.m. in Washington.

Rate Futures

Futures on the CME Group Inc. exchange showed a 62 percent chance the Fed will raise its target rate for overnight bank loans by at least a quarter-percentage point by its November meeting, compared with 58 percent odds a day earlier.

“Given its economic and rate-expectation advantage, the dollar is likely to draw more buying attention,” said Soichiro Mori, a strategist in Tokyo at FXOnline Japan Co.

The Australian dollar rose after yesterday’s biggest drop in seven weeks as a central bank official said benchmark borrowing costs need to climb toward “normal levels” to contain inflation.

Reserve Bank of Australia Assistant Governor Philip Lowe’s comments “reinforce that Australia is in a strong position economically and there continue to be inflationary price movements,” said Timothy Connors, head of currencies at Custom House Global Foreign Exchange in Sydney. “We’ve seen a nice rally from the lows on the back of those comments.”

Australia’s currency climbed 0.6 percent to 91.24 U.S. cents after earlier falling as low as 90.66 cents, the weakest since March 9.

Australia’s mortgage rate “is still around 50 basis points lower than the average of the last decade and a half,” Lowe said in Sydney after a speech. The RBA raised rates four times since October, when it became the first among the Group of 20 nations to increase its benchmark after the start of the financial crisis.

To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

Last Updated: March 25, 2010 04:21 EDT