Euro Stays Lower on Crisis Concern Before French Payrolls

The euro maintained a loss versus the dollar from yesterday amid concern the sovereign debt crisis is constraining growth in the region.
The shared currency remained weaker against the yen before reports this week forecast to show French payrolls declined and European industrial production contracted. Greek politicians will meet for a second time tomorrow amid an impasse on spending cuts required to receive the next tranche of bailout funds. Demand for the dollar was limited before the policy setting Federal Open Market Committee starts its two-day meeting tomorrow.

“We’re bearish on the euro” in the six-month period, said Imre Speizer, a strategist in Auckland at Westpac Banking Corp. (WBC), Australia’s second-largest lender. “We see the risks to the euro-zone economies to the downside.” The 17-nation euro traded at $1.2768 as of 10:18 a.m. in Tokyo from yesterday when it declined 0.5 percent to $1.2758. It was little changed at 99.86 yen from the New York close, when it fell 0.4 percent. The dollar slid 0.1 percent to 78.21 yen.

A final reading on French non-farm payrolls will probably confirm a 0.1 percent decline in the second-quarter from the previous three-month period, according to the median estimate of economists surveyed by Bloomberg News before the national statistics office Insee releases its figures today.
Economists in a separate Bloomberg poll estimate euro-area industrial production declined 3.3 percent in July from a year earlier. The European Union’s statistic office in Luxembourg will report the data tomorrow.

Deeper Depression

Greek Democratic Left leader Fotis Kouvelis, whose party is one of the three in the coalition government, said no decision had been made on spending cuts and that poorer citizens must be protected from austerity measures. The three leaders agreed to meet again tomorrow, two days before euro-area finance ministers gather in Cyprus for a briefing on Greek progress.

German-led austerity demands are “pushing Europe into a deeper and longer depression,” billionaire investor George Soros said in Berlin yesterday. “It’s all too real in the periphery and it will reach Germany in the next six months or so.” The country’s “policies largely determine the outcome of the current crisis. It’s five minutes after midnight,” Soros said.
ESM Ruling Germany’s Federal Constituti
onal Court is due to rule tomorrow on the country’s participation in the European Stability Mechanism, a permanent 500 billion-euro ($638 billion) fund that offers loans to member states and may buy their bonds to lower borrowing costs. Germany will be the biggest contributor to the fund with a 27 percent share, a statement from the European Commission shows. The Netherlands is holding parliamentary elections on the same day.

The implied volatility of three-month options for Group of Seven currencies fell to 7.85 percent yesterday, the lowest since October 2007, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

The UBS AG V24 Carry Index, which measures returns from borrowing in lower-rate currencies to buy higher-yielding ones in so-called carry trades, has fallen 2.8 percent from a four- month high on Aug. 9.

Quantitative Easing


Demand for the dollar was limited before the Federal Reserve’s meeting amid speculation the central bank will introduce a third round of asset purchases, known as QE3. The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against those of six U.S. trading partners, was little changed at 80.355 from 80.4 yesterday. The index on Sept. 7 touched 80.151, the lowest since May 11.

The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of its quantitative-easing strategy. In an Aug. 31 speech, Fed Chairman Ben S. Bernanke defended his unprecedented policies and laid out arguments for further action to combat unemployment, which he called a “grave concern.”
“It’s highly likely that additional easing will be announced at the FOMC meeting,” said Yoshitsugu Fujita, assistant vice president of global markets in New York at Sumitomo Mitsui Trust Bank Ltd. “Should QE3 be announced, the dollar will be sold and probably continue to weaken.”
-- Editors: Jonathan Annells, Naoto Hosoda

 To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
 To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net