Euro Trades Near One-Year Low on Concern Debt Crisis Spreading

By Ron Harui

April 29 (Bloomberg) -- The euro traded near a one-year low against the dollar as concern Europe’s deficit crisis is widening damped the appeal of assets in the 16-nation region.

The yen and dollar rose against most major currencies after the International Monetary Fund said Greece’s fiscal problems may add to “global risk aversion.” The dollar gained versus 11 of its 16 counterparts before a U.S. report that economists said will show the number of Americans filing claims for jobless benefits fell last week. New Zealand’s dollar weakened after central bank Governor Alan Bollard indicated he may raise interest rates at a slower pace than in previous cycles.

“Lingering fears of a further deterioration in the European sovereign debt crisis may weigh on risk sentiment,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Against this backdrop, ‘safe-haven’ currencies such as the dollar and the yen may extend their recent gains.”

The euro traded at $1.3216 as of 6:08 a.m. in London from $1.3221 in New York yesterday when it fell to $1.3115, the lowest level since April 28, 2009. The single currency was at 124.22 yen from 124.32 yen. The dollar traded at 93.89 yen from 94.03 yen, and climbed to $1.5167 per pound from $1.5209.

New Zealand’s dollar weakened the most of the major currencies, sliding 0.6 percent to 71.67 U.S. cents and losing 0.7 percent to 67.28 yen.

‘Spill Over’

Europe’s single currency fell for the third time in four days after the IMF said in its Regional Economic Outlook report that the “main risk scenario” from Greece’s debt crisis is “one of worsening global risk aversion, should the jitters spill over to some of the larger European economies.”

Standard & Poor’s yesterday cut Spain’s credit rating to AA from AA+ and said the outlook on the country’s debt is negative. The company also this week lowered Greece’s borrowings to junk and reduced Portugal’s to the third-lowest investment grade.

S&P’s decision to cut Spain’s rating came as European Union policy makers pushed to speed distribution of 45 billion euros ($59.4 billion) in emergency aid already pledged to Greece by the euro area and the International Monetary Fund on April 11.

The extra yield investors demand to hold Spain’s 10-year debt rather than German equivalents widened to 112.5 basis points this week, the most in more than a year.

‘Growing Pessimism’

“Growing pessimism on the medium-term outlooks for euro- zone economies, higher borrowing costs and continued indecision will keep weighing on the euro,” Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday.

Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc. as Europe’s worsening fiscal crisis threatens to splinter the 16-nation currency union.

Pension funds and banks sold euros this month at the fastest pace since the second half of 2008, when the currency tumbled more than 25 percent against the dollar between mid-July and the end of October, according to Bank of New York Mellon Corp., the world’s biggest custodian of financial assets with $23 trillion. Demand for options giving the right to sell the euro against the dollar versus those allowing for purchases rose yesterday to the highest level since November 2008.

Dollar Index

The Dollar Index was near an 11-month high before a U.S. Labor Department report today that economists said will show initial jobless applications dropped by 11,000 to 445,000.

The Federal Reserve said in its policy statement yesterday that the labor market is “beginning to improve.” The central bank kept its target lending rate in a range of zero to 0.25 percent at the end of its two-day policy meeting, as forecast by all economists surveyed by Bloomberg News.

“The Fed’s assessment of the economy is a bit more upbeat,” said Khoon Goh, a senior economist at ANZ National Bank Ltd. in Wellington. “This may add further weight to the belief that the dollar has further strength to come, potentially at the expense of the euro.”

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was at 82.254 from 82.381 yesterday, when it rose to 82.714, the strongest since May 2009.

New Zealand’s dollar declined after the Reserve Bank said risks to the global outlook remained “elevated.” Bollard said he expected to “begin removing policy stimulus over the coming months.”

The statement is “more negative for kiwi than positive given the fairly cautious tone,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “They note improved external factors but also higher risks around that -- clearly a reference to the euro-zone debt problems.”

There is a 64 percent chance the RBNZ will increase its target rate by 25 basis points at its meeting in June, according to a Credit Suisse AG index. The central bank will raise rates by 1.85 percentage points over the next 12 months, a separate index shows.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: April 29, 2010 01:14 EDT