Euro Weakens Before Finance Ministers Meeting; Kiwi Slides on Retail Sales

By Lucy Meakin and Monami Yui - Feb 14, 2011 8:43 PM GMT+0800

The euro dropped versus most of its major counterparts on speculation a meeting of European finance ministers will struggle to bridge differences over conditions for expanding the region’s bailout fund.

Europe’s single currency fell for a second day against the yen as Ireland’s main opposition party said it wants to renegotiate details of the country’s bailout and Greece criticized demands from the European Union and International Monetary Fund for sales of state assets. New Zealand’s dollar fell as a report showed retail sales declined.

“Most investors in the euro zone would like to feel that the Greek and Irish situation has been put behind them, and obviously that’s not true,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “The weakness in the euro is consistent with that.”

The euro fell 0.8 percent to 112.21 yen as of 7:41 a.m. in New York. The single currency also declined 0.8 percent versus the dollar, to $1.3443. The yen was little changed at 83.46 per dollar from 83.43.

The euro extended its declines after Reuters reported that a rescue plan for WestLB AG, the German state-owned bank bailed out during the financial crisis, may founder.

“The WestLB situation is something that’s ongoing,” said Steve Barrow, the London-based head of research for Group-of-10 currencies at Standard Bank Plc. “It’s not a shock, but nonetheless, in a market that’s turning more bearish on the euro, the bears are going to use it for all it’s worth.”

Deficit Targets

Enda Kenny, leader of Ireland’s largest opposition party, Fine Gael, yesterday said senior bank bondholders should share the cost of bailing out the country’s financial system. He said a new government would seek to renegotiate details of the international bailout after Feb. 25 national elections.

Greek government spokesman George Petalotis said demands for asset sales to raise as much as 50 billion euros by 2015 to pay down debt were “unacceptable.”

The nation last week also joined Italy in opposing annual numerical debt-reduction targets. Greece, which required financial aid last year to help counter its widening deficit, said the proposed rule would force it to make unsustainably large cuts once its support package runs out in 2013, according to a draft of EU legislation.

European finance ministers will meet to review the rules today and tomorrow in Brussels.

Disappointed Investors

Greece will probably have to restructure its debt as interest payments rise, Lars Feld, who is joining Germany’s council of economic advisers next month, told Sueddeutsche Zeitung in an interview published today.

A separate European summit on March 11 aimed at resolving the region’s debt crisis in peripheral economies will probably disappoint investors, according to Standard Life Investments, Scotland’s second-biggest fund manager.

“It would be quite difficult to meet expectations, as they appear to be high at the moment,” Euan Munro, head of fixed income, said in an interview on Feb. 10.

The yield on Portugal’s 10-year bond rose six basis points to 7.37 percent. The rate reached 7.64 percent on Feb. 10, the highest since the euro’s introduction in 1999.

“The recent surge in Portuguese bond yields is a bad sign” for the country’s borrowing costs, saidYuji Saito, director for the foreign-exchange department at Credit Agricole Corporate and Investment Bank in Tokyo. “The euro’s weakness is likely to persist.”

Pound Gains

The franc rose for the first day in seven versus the euro as investors sought the safety of Switzerland’s currency, strengthening 0.8 percent to 1.3084.

The pound appreciated 0.7 percent to 84.08 pence per euro. Reports this week may show consumer price inflation is gathering pace, reinforcing expectations that the Bank of Englandwill raise interest rates. The central bank publishes its quarterly inflation report on Feb. 16. Sterling was little changed versus the dollar at $1.6004.

The yen advanced for the first time in almost two weeks versus the dollar on speculation Japanese companies bought the currency to bring home overseas earnings before Japan’s fiscal year ends in March.

“There’s talk of Japanese firms buying the yen, possibly related to fiscal year-end repatriation,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The recent slide in the yen may be attractive to them.”

U.S. Redemptions

Japan’s large manufacturers expect the yen to average 86.47 per dollar this fiscal year through March 31, the highest since the Bank of Japan’s Tankan business-confidence survey included the yen-forecast question in 1996. That compares with the 89.66 predicted in September, the survey showed Dec. 15.

Japanese companies may also bring home funds from their overseas bond holdings. The U.S. will make $45 billion in redemption and coupon payments for Treasuries tomorrow, according to estimates by Stone & McCarthy Research Associates in Princeton, New Jersey.

New Zealand’s currency fell for a fourth day versus the dollar. Retail sales declined 1.1 percent in December from the previous month, when they rose a revised 1.2 percent, Statistics New Zealand said today in Wellington.

Swaps traders are betting the Reserve Bank of New Zealand will raise its benchmark interest rate by 52 basis points over the next 12 months, down from 55 basis points last week, according to a Credit Suisse AG index.

The New Zealand dollar declined 0.8 percent to 75.48 U.S. cents, and dropped 0.7 percent to 63.02 yen.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.