By Kristine Aquino and Candice Zachariahs - Sep 20, 2011 12:44 PM GMT+0800
The euro fell for a third day against the dollar after Standard & Poor’scut Italy’s credit rating, adding to concern Europe’s worsening debt crisis will raise borrowing costs for countries in the region.
The 17-nation euro extended declines versus the yen into a third day before Greece resumes discussions with its creditors over the next installment of rescue funds. The dollar gained versus most major peers before the Federal Reserve’s policy meeting today. Australia’s dollar held losses even after the Reserve Bank said it was “well placed” to respond to economic risks. South Korea’s won dropped to its weakest this year as a slump in Asian stocks curbed demand for emerging-market assets.
““We’re going to see the euro continue to come under pressure,” said Chris Weston, an institutional trader at IG Markets in Melbourne. “One of the big things we’re very concerned with is what’s going to happen with Italian borrowing costs and this could see some further selling of bonds.”
The euro slid to $1.3607 as of 1:19 p.m. in Tokyo from $1.3686 in New York yesterday. It declined to 104.11 yen from 104.82. The dollar bought 76.52 yen from 76.58.
The MSCI Asia Pacific index of shares declined 1.1 percent. The Standard & Poor’s 500 index lost 1 percent yesterday and the Stoxx Europe 600 index slumped 2.3 percent.
The rating for Italy, which has Europe’s second-largest debt load, was lowered to A from A+, S&P said yesterday in a statement. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.
‘Weakening’ Prospects
“Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said.
Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit ratings cut this year. The European Central Bank last month started buying Italian and Spanish government bonds after the region’s debt crisis pushed their yields to euro-era records.
Greek Prime Minister George Papandreou’s government will hold another call with European Union and International Monetary Fund officials tonight in a bid to secure a sixth installment of rescue funds, amid concern the austerity measures demanded are deepening a three-year recession and making it harder for the government to meet its deficit goals.
Finance Minister Evangelos Venizelos held “substantive” discussions with the officials, the finance ministry said in an e-mailed statement after a teleconference last night.
‘Selling Into Rallies’
“I’d be selling into rallies in the euro,” said Richard Grace, the Sydney-based chief foreign-exchange strategist and head of international economics at Commonwealth Bank of Australia. “The conditions of receiving the payment are that Greece implements austerity measures and it looks like they’re having difficulty doing that. The implication is the next tranche is withheld.”
Papandreou is considering holding a referendum on whether his nation should remain in the common currency, the Kathimerini newspaper said, citing people it didn’t name. A bill to set up a referendum on the euro may be submitted to parliament and discussed in the coming days, the Greek newspaper said.
Fed Policy
The dollar held on to its advance versus most of its major counterparts before Fed officials begin a two-day meeting today.
Fed policy makers may decide to replace some of the short- term Treasuries in the central bank’s $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists at Wells Fargo & Co., Barclays Plc and Goldman Sachs Group Inc. Some analysts dub the maneuver Operation Twist because it would bend long-term yields lower.
The Fed may go further by also reducing the interest rate paid on reserves, according to Adrian Foster, head of financial- market research for Asia at Rabobank Groep NV in Hong Kong.
“Everyone is worried about all the risks, so this time around when we see a central bank actually taking more aggressive action than the average market expectation, you may get a bit of a boost to the dollar,” Foster said.
The yen strengthened against all of its 16 most-traded peers. Japan’s trade minister Yukio Edano said the country will deal with any speculative currency moves.
RBA Minutes
The Reserve Bank of Australia said it was well positioned to respond to global and domestic economic risks or the threat of an acceleration of inflation, according to minutes of a Sept. 6 meeting at which policy makers kept its cash target unchanged at 4.75 percent.
“Members considered that the current setting of monetary policy left the board well placed to respond to evolving global and domestic economic conditions,” the minutes showed.
The so-called Aussie slid to $1.0202 from $1.0222 yesterday. It earlier fell to as low as $1.0149, its weakest level since Aug. 11. It fetched 77.99 yen from 78.29, after earlier losing as much as 0.7 percent.
South Korea’s won and Malaysia’s ringgit reached 2011 lows as Asian stock losses and the European debt crisis damped demand.
“Risk aversion has gone to the next level and the losses are justified given that European officials have not been able to reassure the markets on the default risk,” said Suresh Kumar Ramanathan, a strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “Asian assets are getting sold off in favor of cash.”
The won dropped 1.6 percent to 1,155.78 per dollar after earlier touching 1,156.50, its lowest level since Dec. 22, according to data compiled by Bloomberg. Malaysia’s ringgit retreated 0.5 percent to 3.1380 per dollar. It earlier dropped to as low as 3.1425, the weakest since Dec. 21.
To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
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