Euro Weakens on Debt Crisis Concern as Finance Ministers Prepare to Meet

By Yoshiaki Nohara and Ron Harui - Jan 17, 2011 11:23 AM GMT+0800

The euro declined for the first time in six days against the dollar on concern the region’s debt crisis will linger after Greece had its credit rating cut to junk last week. Photographer: Denis Doyle/Bloomberg

The euro fell against the dollar, snapping a five-day gain, on concern the region’s debt crisis will worsen even as European finance ministers prepare to meet today to hammer out a revamped strategy.

The single currency weakened against 14 of its 16 major counterparts after Bank of Japan Governor Masaaki Shirakawa said European financial markets remain unstable because of concern about the long-running crisis. Thailand’s baht dropped the most in a week on speculation the central bank will curb appreciation that threatens an export-led economic recovery. Australia’s dollar declined toward a six-week low versus New Zealand’s on concern flooding will slow economic growth.

“The debt problem is not going to go away,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. “I don’t think finance ministers will lead to a big overhaul of their financing facility. We have pretty hard conviction that the euro is still a sell.”

The euro declined to $1.3339 as of 12:20 p.m. in Tokyo from $1.3388 in New York on Jan. 14, when it climbed to $1.3457, the highest level since Dec. 14. The single currency slid to 110.59 yen from 110.94 yen. The dollar was little changed at 82.91 yen from 82.87 yen.

Greek Rating

Greece lost its last investment-grade rating on Jan. 14 when Fitch Ratings cut its debt ranking one level to BB+, or junk. The reduction was foreshadowed by a warning last month and puts the rating at the same level as at Moody’s Investors Service and Standard & Poor’s.

“Financial markets in Europe continue to be volatile because of concern about sovereign-debt risk,” Shirakawa said at a quarterly meeting of the BOJ’s branch managers today in Tokyo. At the same time, “global financial markets on the whole have maintained stability,” he said.

European finance chiefs commence work this week on a new debt-crisis-fighting strategy with Germany easing its opposition to an expanded arsenal and Portugal saying it will get by without an aid package. Germany is seeking a March deadline for increasing the 440 billion-euro ($587 billion) rescue fund, drawing up a permanent aid facility and rewriting the euro- zone’s budget-deficit rules.

Ireland’s banks are calling on the nation’s central bank for emergency loans as their collateral to borrow from the European Central Bank is low, the Telegraph reported, citing government data.

The latest data show Anglo Irish Bank Corp. and other lenders had borrowed 51 billion euros from the Irish central bank by the end of December, under a program listed in the balance sheet as “other assets,” the newspaper reported.

Gains Excessive

The euro also fell on speculation its 3.7 percent gain versus the dollar last week was excessive.

“Positions have been unwound a lot, and I find it hard for the euro to extend gains versus the dollar from here,” said Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG. “The market has been focusing on the euro rather than on the dollar.”

The euro has gained 2 percent over the past week in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has lost 1.6 percent, and the dollar is down 1.4 percent.

Thai Baht

The Thai baht dropped, extending two weeks of losses, after central bank Deputy Governor Atchana Waiquamdee said last week policy makers will consider imposing capital controls if inflows begin to hurt the economy and the baht strengthens too quickly.

Official data on Jan. 14 showed foreign-exchange reserves rose for a sixth week in the period ended Jan. 7, suggesting the monetary authority may have bought dollars.

“While the global economic picture remains uncertain, the authorities may not want to allow the baht’s appreciation,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo. “Concern about intervention is lingering in the market, encouraging some selling of the baht.”

The baht dropped 0.3 percent to 30.57 per dollar, after sliding 1.6 percent over the past two weeks.

Australia’s dollar fell for a third day versus New Zealand’s as flooding in the northeastern state of Queensland killed at least 28 people, devastated homes, destroyed crops and closed mines in the past six weeks.

Heavy rainfall moving south and overloading the nation’s river systems is threatening more towns and may add to a bill already running into billions of dollars.

“The focus in Australia is still on the flooding and what that means for growth and inflation pressures going forward,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Last week’s marked loss in Aussie-kiwi may continue.”

Australia’s dollar dropped to NZ$1.2864 from NZ$1.2906 last week, when it declined to NZ$1.2852, the lowest since Dec. 2. The so-called Aussie was little changed at 98.80 U.S. cents.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds atnreynolds2@bloomberg.net.