Euro Weakens as Stocks Decline on Concern Greece May Default

By Lukanyo Mnyanda and Candice Zachariahs

April 8 (Bloomberg) -- The euro weakened for a fifth day against the dollar in its longest sequence of declines since January as stocks fell on speculation that Greece may default on its debt, stalling Europe’s economic recovery.

The 16-nation currency also slumped to its lowest level in almost two weeks against the yen after Greek Finance Minister George Papaconstantinou failed to dispel concern about a default, saying there will be no need for additional measures to shore up the nation’s finances. European Central Bank President Jean-Claude Trichet, who held the region’s key interest rate at a record low today, said default is “not an issue” for Greece. The pound fell on speculation next month’s U.K. election will produce a government without a parliamentary majority.

Trichet “seems to be hoping that the reforms that are being implemented will be enough to reassure markets but unfortunately that’s not the case,” said Vincent Chaigneau, head of currency and fixed-income strategy at Societe Generale SA in London. “The euro still looks vulnerable.”

The euro weakened to $1.3322 at 2:04 p.m. in London, from $1.3344 yesterday, and to 123.99 yen, from 124.57 yen. It slumped to 123.44 earlier, the weakest level since March 26. The last time the euro dropped for five consecutive days versus the dollar was on Jan. 21. The yen strengthened to 93.08 per dollar, from 93.36.

Yield Spread 

The extra yield investors demand to hold Greek 10-year securities instead of German bunds widened to 443 basis points, the most since before the euro’s 1999 debut, amid growing concern Greece won’t be able to plug a budget deficit that is almost 13 percent of gross domestic product. Greek credit- default swaps rose to a record 4.66 percentage points, according to CMA DataVision.

Investors are growing increasingly concerned that a European Union and International Monetary Fund rescue plan put together last month for Greece, the region’s most indebted nation, will unravel. It will take some time for spreads to narrow and there will be no need for extra measures as long as Greece’s stability pact is implemented “correctly,” Papaconstantinou told Greece’s ANT1 television, according to an e-mailed transcript.

The activation of the EU’s aid mechanism for Greece is in the country’s own hands. Trichet told reporters in Frankfurt following the rate decision. The central bank kept its main refinancing rate at 1 percent, matching the predictions of 62 economists surveyed by Bloomberg. It won’t increase borrowing costs until next year, a separate survey shows.

“In the short run, the persistence of alarming risk spreads will lead to even more cautious behavior among depositors and investors,” Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., wrote yesterday in the Financial Times. “Unfortunately it is likely that things will get worse for Greece before they get better.”

GDP Unchanged 

An EU report yesterday showed GDP in the 16-member euro area remained unchanged in the fourth quarter. The statistics office in Luxembourg had previously reported an expansion of 0.1 percent from the third quarter, when it rose 0.4 percent. Industrial production in Germany, the largest of the economies sharing the euro, stagnated in February, the Economy Ministry in Berlin said today.

“Sentiment is euro-skeptical, and we’re going to see a continued erosion,” said Peter Rosenstreich, Geneva-based chief market analyst at ACM Advanced Currency Markets, which handles about $150 billion of foreign-exchange trades a month. “The growth situation is fragile at best and rates are going to stay low for a very long time.”

The pound declined for a third day after the Bank of England kept the U.K.’s benchmark rate at an all-time low of 0.5 percent and held its asset-purchase plan at 200 billion pounds ($304 billion). Sterling slid 0.2 percent to $1.521 and was little changed at 87.63 pence per euro.

Election Poll 

Prime Minister Gordon Brown’s ruling Labour Party closed to within 5 percentage points of the opposition Conservatives, a result that would make his party the largest bloc after the May 6 election, a YouGov Plc poll showed. The daily survey, conducted April 6 and 7, gave the Conservatives 37 percent support and Labour 32 percent, according to YouGov.

The currency has declined 6 percent against the dollar this year partly on speculation that elections won’t produce a government strong enough to tackle the nation’s record budget deficit, the largest in the Group of Seven nations.

The yen strengthened as stocks declined. The Stoxx Europe 600 Index fell 1.1 percent and the Nikkei 225 Stock Average dropped 1.1 percent. Standard & Poor’s 500 Index futures slipped 0.4 percent.

Yen Strength 

“Yen strength stood out against a backdrop of increasing risk aversion from the ongoing sovereign debt uncertainties,” Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada, wrote today in a report.

Japan’s currency also gained on speculation China will allow the yuan to appreciate, providing scope for Japan to let its currency rise. A modification of the country’s exchange-rate policy may be made in the next few days, the New York Times reported today, citing people with the knowledge of the matter whom it didn’t identify.

U.S. Treasury Secretary Timothy F. Geithner will meet with Chinese Vice Premier Wang Qishan in Beijing today, according to a Treasury spokesman. Chinese central bank adviser Li Daokui said the yuan exchange rate issue may become “clear” after the U.S.-China Strategic and Economic Dialogue, the 21st Century Business Herald reported today.

China should open the yuan bond market to foreign investors, and Chinese banks and companies should issue more yuan bonds offshore, Xia Bin, an adviser to the People’s Bank of China, said in Shanghai today.
“China knows as well as I do they do not have a major world economy with a fixed currency,” said investor Jim Rogers in a Bloomberg Television interview. “I hope the Chinese will let it float. Lots of people will benefit.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
Last Updated: April 8, 2010 09:17 EDT