By Oliver Biggadike and Lukanyo Mnyanda
May 11 (Bloomberg) -- The euro fell for the first time in three days versus the dollar and yen on concern the region’s most-indebted nations will struggle to contain deficits even after policy makers provided an almost $1 trillion bailout.
Europe’s shared currency resumed its decline as Germany’s Boersen-Zeitung newspaper reported that European Central Bank council member Axel Weber said the bank’s purchase of government bonds poses “significant” risks. The yen gained against all of its 16 most-traded counterparts as Europe concern damped appetite for riskier assets and investors exited trades funded with the currency.
“The euro will underperform going forward on a multi-month basis,” said Lauren Rosborough, a senior currency analyst at Westpac Banking Corp. in London. “It doesn’t dissipate the need for fiscal austerity. It doesn’t actually solve the solvency issue.”
The euro dropped 0.7 percent to $1.2695 at 9:17 a.m. in New York, from $1.2787 yesterday, when it reached $1.3094, the highest level since May 4. The euro fell 1.5 percent to 117.44 yen, from 119.28 yesterday, when it rallied 2.1 percent. The dollar decreased 0.9 percent to 92.50 yen, from 93.29.
The 16-nation currency traded below $1.2755, its close on May 7 before euro zone leaders agreed to loans of as much as 750 billion euros ($952 billion), including support from the International Monetary Fund. Greece’s budget deficit of 13.6 percent of gross domestic product is the second highest in the euro area after Ireland’s 14.3 percent ratio.
The euro has lost 7.8 percent this year, according to Bloomberg Correlation-Weighted Indices. The dollar has gained 5.5 percent, and yen has advanced 6.2 percent.
Japan’s Yen Gains
Japan’s currency gained against more than 150 currencies as yen-funded investments in higher-yielding countries such as Mexico and South Africa lost money, Bloomberg data show.
An index tracking carry trades in the Mexican peso, Brazilian real, South African rand and Australian and New Zealand dollars fell to 96.34 today from 98 yesterday.
Marek Belka, director of the IMF’s European department, told a panel at a World Economic Forum conference yesterday in Brussels that he doesn’t see the lending package as a “panacea for European problems. This is some kind of morphine that stabilizes the patient -- and the real medication and the real treatment has to come.”
The ECB said yesterday it will counter “severe tensions” in “certain” markets by purchasing government and private debt, adding to signs the central bank will keep interest rates at a record low even as its peers start to raise them.
Weber on ‘Risks’
By resorting to what some banks including Societe Generale SA have called the “nuclear option,” the ECB may open itself to the charge it’s undermining its independence by helping governments plug budget holes. ECB President Jean-Claude Trichet said the debt purchases weren’t supported by all 22 of its Governing Council members.
“The purchase of government bonds poses significant stability risks, and that’s why I’m critical toward this part of the ECB council’s decision, even in this extraordinary situation,” Weber told Boersen-Zeitung in an interview. “It’s now critical to keep these risks as minimal as possible.” The Bundesbank, which Weber heads, confirmed the remarks.
“There are factors that are a burden for the euro which are too obvious to be ignored for longer than one morning,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “The ECB will remain in emergency mode for a prolonged period.”
Greece may have its credit rating lowered to junk within the next month, Moody’s Investors Service said yesterday, citing the country’s “dismal” economic prospects.
Finance Ministers
Portugal’s rating, which is also on review for a downgrade, will probably be lowered one level to Aa3, from Aa2, though an “adjustment” of two steps to A1 can’t be ruled out, Moody’s said. No “significant” rating action is likely “in the short run” for Ireland, the company said.
European Union Economic and Monetary Affairs Commissioner Olli Rehn told the French daily Les Echos in an interview that Spain and Portugal must take immediate steps to improve their public finances.
Measures to be taken by the countries will be discussed at the next meeting of European Union finance ministers on May 18, Rehn told Les Echos.
“We are in little doubt that steps taken, in particular by the ECB, will offer the euro little support and the aid package does not change the fact that Spain and Portugal in particular will still have to undergo further painful austerity measures,” Derek Halpenny, European head of currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London, wrote in an investor note.
The Swiss franc climbed against the euro after a report showed Switzerland’s consumer confidence rose last month to the highest level in more than two years.
The Swiss franc appreciated 0.7 percent to 1.4090 against the euro, from 1.4193 yesterday. The State Secretariat for Economic Affairs said an index of consumer confidence based on a quarterly survey of 1,100 households increased to 14 in April from minus 7 in January.
The currency gained versus most of its major counterparts, advancing 1.2 percent to 6.8614 Swedish kronor and appreciating 1.2 percent to 6.8323 South African rand.
To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net. Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.
Last Updated: May 11, 2010 09:17 EDT
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