Euro Falls to Lowest in Year as Greek Bailout Concern Persists

By Ben Levisohn and Oliver Biggadike

May 4 (Bloomberg) -- The euro traded below $1.31 for the first time since April 2009 on concern a 110 billion-euro ($144 billion) rescue package for Greece will fail to contain the region’s debt crisis.

The common currency fell against most of its peers after European Union spokesman Amadeu Altafaj said aid to Greece might not be approved by all governments this month, when the nation needs to refinance 8.5 billion euros in debt. Traders in overnight interest-rate swaps lowered predictions for European Central Bank rate increases in the next 12 months, damping the appeal of euro-denominated assets as stocks in the region fell.

“The market is concerned about whether the plan will go off track and that’s weighing on the euro,” said Aroop Chatterjee, a strategist at Barclays Plc in New York. “It’s wondering whether parliamentary approvals will come through and there are some questions in regard to reform resistance within Greece.”

The euro fell 1 percent to $1.3058 at 10:04 a.m. in New York and touched $1.3037, the least since April 28, 2009. The yen was 94.57 per dollar from 94.54 in New York yesterday, after trading at 94.99, the weakest since Aug. 24, 2009.

The yen appreciated against most of its major counterparts as stocks and oil fell, dampening demand for assets linked to growth. Crude oil for June delivery fell as much as 2.9 percent to $83.72 a barrel on the New York Mercantile Exchange. The Stoxx Europe 600 Index slid 2 percent to 255.28.

Deficit Limit

The euro declined as investors sought more evidence that the rescue package approved over the weekend will resolve Greece’s debt crisis.

The three-year financial lifeline requires Greece to reduce its budget deficit below the European Union limit of 3 percent of gross domestic product by the end of 2014, a year later than originally planned. Aid for Greece is of “enormous” importance, German Chancellor Angela Merkel said yesterday after convening a special meeting of her Cabinet that approved loans for Greece of as much as 22.4 billion euros over three years.

The ECB will probably raise interest rates by 0.46 percentage point in the next year, according to interest-rate swaps data compiled by Credit Suisse Group AG. The swaps, used to speculate on the direction of borrowing costs, show the slowest pace of rate increases since September and are less than half the 1.1 percentage points anticipated in January.

Greek government workers shut down schools and hospitals and disrupted flights as demonstrators occupied the Acropolis in an escalation of protests against 30 billion euros ($40 billion) of additional wage cuts and tax increases unveiled this week.

Prime Minister George Papandreou has called on Greeks to endure more sacrifices in return for the bailout from the European Union and the International Monetary Fund. The austerity measures, called “savage” by union groups, include a second set of wage cuts for public workers, a three-year freeze on pensions and a second increase this year in sales taxes and the price of fuel, alcohol and tobacco.

Lending Rules

The 16-nation euro has lost 6.5 percent of its value this year amid concern Greece’s fiscal woes will push up borrowing costs for other nations, Bloomberg Correlation-Weighted Currency Indexes show.

The euro also fell after the ECB yesterday diluted lending rules for the second time in a month to guarantee that Greek debt will still be accepted as collateral for loans.

“The ECB’s credibility has been shot to pieces, and we’ve yet to see the political fallout from the Greek bailout,” said Steven Barrow, head of Group of 10 currency research at Standard Bank Plc in London. “The only restriction on the euro’s downside is that the market is already so short the currency.”

Australia’s Decline

Australia’s dollar fell against 15 of 16 of its most-active counterparts after the central bank signaled today’s interest- rate increase, the sixth in seven meetings, may be the last for some time. Policy makers led by Governor Glenn Stevens said it represents a “significant adjustment” in monetary policy.

Australia’s benchmark interest rate of 4.5 percent is 440 basis points higher than Japan’s and at least 425 more than the U.S.’s, making the nation’s assets more attractive to investors seeking higher returns.

Australia’s currency slipped 1.5 percent to 91.25 U.S. cents, and fell 1.5 percent to 86.24 yen. It climbed to 88.06 yen on April 30, the strongest since September 2008.

To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net;

Last Updated: May 4, 2010 10:07 EDT