Euro Near 2-Week Low as Protests Add to Crisis Concerns

By Mariko Ishikawa - Sep 27, 2012 11:57 AM GMT+0800

The euro traded 0.3 percent from a two-week low against the dollar as protests against European austerity measures added to obstacles for leaders seeking to stem the region’s debt crisis.
The 17-nation currency remained lower against the yen after completing a seven-day drop yesterday, the longest since May, before Spanish Prime Minister Mariano Rajoy submits a fifth package of budget cuts. Demonstrators gathered near parliament in Madrid yesterday, while Greek police in Athens dispersed protesters with tear gas. The New Zealand dollar rose after a private report showed the nation’s business outlook improved this month.

“When you see austerity protests going on across Europe, that concerns the broader market and it certainly will make investors more cautious of taking a long euro position,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk management company.

A long is a bet that an asset will rise, and Averill expects euro will weaken to $1.26 in the next 10 days.
The euro traded at $1.2875 as of 12:53 p.m. in Tokyo from $1.2873 yesterday, when it touched $1.2835, the lowest since Sept. 12. The shared currency slid 0.1 percent to 99.99 yen. It has lost 3.1 percent since Sept. 17 against the Japanese currency. If the euro completes an eighth day of declines, it will be the longest slide since the eight-day drop ended May 31.

The yen gained 0.1 percent to 77.66 per dollar from yesterday, when it touched 77.59, the strongest since Sept. 14.

Early Elections

Spanish bonds dropped yesterday, sending the yield on 10- year securities above 6 percent for the first time since Sept. 18. Catalan President Artur Mas called early elections for Nov. 25, as Rajoy struggles to gain acceptance for austerity measures and faces criticism from European leaders for delaying a decision on a bailout to support the nation’s bond market.

“There’s an enormous amount of political uncertainty,” Ray Attrill, Sydney-based global co-head of currency strategy at National Australia Bank Ltd., said in a Bloomberg Television interview. Spanish 10-year yields “are in danger of going up into that 7 percent area that effectively locks Spain out of the markets.”

The euro has weakened 3.2 percent in 2012, the worst performance after the yen among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The Japanese currency has lost 3.5 percent, while the dollar has weakened 2.5 percent.
MSCI World Index of stocks dropped 1.3 percent yesterday, the biggest one-day decline since July 23.

Risk Aversion

“The yen is strengthening in a risk-averse market,” said Kengo Suzuki, a currency strategist in Tokyo at Mizuho Securities, a unit of Japan’s third-largest bank by market value. “Investors may get disappointed if the spending cuts by Spain are seen as not enough. The market remains very cautious as Spanish yields head higher and the situation in Europe becomes more unstable.”

The yen tends to gain during economic and financial turmoil because Japan’s trade surplus makes it less reliant on foreign capital. The currency rose toward the strongest level in almost two weeks against the dollar on speculation central banks around the world will struggle to revive growth.

The European Central Bank on Sept. 6 agreed to an unlimited bond-buying program aimed at regaining control of interest rates in struggling nations such as Spain and Italy. Italy will today auction as much as 7 billion euros ($9 billion) of bonds maturing in 2017 and 2022.

Confidence Index

An index of consumer confidence in the euro area probably dropped to minus 25.9 this month, the lowest since May 2009, according to economists surveyed by Bloomberg News before the final reading of the gauge is released today.

In the U.S., the Federal Reserve said Sept. 13 it will buy $40 billion of mortgage-backed securities each month in a third round of quantitative easing, or QE, that aims to spur economic growth through low borrowing costs.

The Bank of Japan (8301) may consider buying foreign bonds to weaken the yen, the Mainichi cited board member Takehiro Sato as saying. The BOJ on Sept. 19 expanded its asset purchase fund by 10 trillion yen ($129 billion) to 55 trillion yen.

Citigroup Inc., the third-largest U.S. bank by assets, reduced its underweight position on the yen and an overweight bet on Sweden’s krona.
The yen “remains undeterred by the BOJ’s recent expansion of the asset-purchases program,” Citigroup’s Group-of-10 currency strategy team led by Steven Englander, wrote in a note to clients yesterday. “We expect continued yen strengthening if market sentiments remain weak.”

New Zealand’s dollar gained after a private report showed the nation’s business outlook improved this month. ANZ National Bank Ltd. said a net 29.3 percent of New Zealand companies polled expect their own activity will improve in the next 12 months, up from 26.4 percent in August and the highest level since May, citing results of its survey.
The currency rose 0.1 percent to 82.53 U.S. cents.

To contact the reporter on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net