By Ben Levisohn
April 27 (Bloomberg) -- The yen and dollar strengthened versus most of their major counterparts on concern European governments may fail to prevent Greece’s deficit crisis from spreading, deterring demand for higher-yielding assets.
The euro dropped versus the dollar as Standard & Poor’s cut the rating of Portugal’s debt and Germany’s Chancellor Angela Merkel said yesterday in a campaign appearance that Greece “must do its homework” to reduce its deficit.
“We’re going through a wave of risk aversion,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “Germany’s not happy about the bailout, and we’re seeing pressures move out of Greece into other parts of Europe. Euro- dollar should be much lower.”
The yen gained 1.3 percent to 124.08 per euro at 11:15 a.m. in New York, from 125.73 yesterday. The euro slipped 0.6 percent to $1.3303, from $1.3383. The dollar decreased 0.7 percent to 93.65 yen, from 93.96.
South Africa’s rand fell 0.7 percent to 7.39 per dollar and Australia’s currency dropped 0.8 percent to 86.42 yen on speculation investors will reduce carry trades, in which they buy higher-yielding assets with amounts borrowed in nations with low borrowing costs. The benchmark interest rates of 0.1 percent in Japan and zero to 0.25 percent in the U.S. have made the dollar and yen popular for funding such transactions.
Portugal’s long-term local and foreign currency sovereign issuer credit ratings were cut today from A+ to A- at S&P, which cited “fiscal and economic structural” weakness.
‘More Aggressive’
“The downgrade was more aggressive than expected,” said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York. “If Portugal comes under attack, you get to Spain pretty quickly. I can’t believe the euro will hold up if the contagion spreads.”
Finance Minister George Papaconstantinou said in an e- mailed transcript of his statements in Athens that he is absolutely certain that talks with the European Union and International Monetary Fund will be wound up in time for the country to pay debt obligations due May 19.
Greece’s biggest union, the General Confederation of Greek Workers, said today that it will hold a 24-hour national strike on May 5, with the nation’s federation of civil servants also joining the walkout to protest government austerity measures.
Merkel told reporters yesterday in Berlin that there will be no decision on aid for Greece until a plan of budget cuts is worked out, Germany will assist the Mediterranean nation only after it agrees to take “tough” measures, she said.
Greece’s ‘Homework’
“I’ve said for weeks that Greece must do its homework first,” Merkel also said yesterday, drawing applause from an audience in Soest in North Rhine-Westphalia, where state elections are scheduled for May 9.
The cost to protect European sovereign debt against default surged to records on concern that Greece’s fiscal crisis is starting to hurt the borrowing ability of indebted nations throughout the region.
Credit-default swaps tied to Greece’s government bonds climbed 54 basis points, or 0.54 percentage point, to 764. Yields on Greece’s debt stayed near the highest level since at least 1998 today on mounting concern the nation will ask investors to accept delayed or reduced payments on its debt.
“Going forward, the euro is going lower, not higher,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London.
Fed Rate View
Futures on the CME Group Inc. exchange showed a 70 percent chance the Federal Reserve will raise its benchmark rate by at least a quarter-percentage point by its December meeting, compared with 65 percent odds a week ago.
The central bank will hold its target rate for overnight lending at a range of zero to 0.25 percent tomorrow, all of the 102 economists in a Bloomberg News survey predicted.
The New York-based Conference Board’s sentiment index rose to 57.9 in April from a revised 52.3 in the previous month. The median forecast of 78 economists in a Bloomberg News survey was for an increase to 53.5 from a previously reported 52.5. The share of consumers expecting more jobs to become available rose to a seven-month high of 18 percent.
“These were fantastic numbers,” said Andrew Busch, a global currency strategist at Bank of Montreal in Chicago. “The Fed understands that the economy is recovering and jobs are coming without question.”
South Korea’s won fell the most in two months versus the greenback after Kim Ik Joo, director-general at the Ministry of Strategy and Finance, said measures will be taken to counter “herd behavior” in the foreign-exchange market. The remarks reflect concern that the currency’s 21 percent rally over the past year may erode profits for exporters.
The won slid 0.6 percent to 1,110.15 per dollar after declining as much as 0.9 percent, the most since Feb. 25. The currency appreciated yesterday to 1,102.85, the strongest level since September 2008.
To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net
Last Updated: April 27, 2010 11:19 EDT
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