The euro tumbled for a second week against the dollar, falling to its lowest level in more than four years as concern that Europe’s debt crisis is spreading pushed investors to the safest currencies.
Europe’s shared currency plunged below $1.20 for the first time since March 2006 and dropped for a sixth straight week versus the yen. The dollar and the yen climbed as a lower-than- forecast payrolls report yesterday fueled concern the U.S. economic recovery may be slowing, damping demand for growth- linked currencies. U.S. retail sales growth slowed to 0.2 percent in May, data next week may show.
“There’s one driver of the market, and it’s called Europe,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Will budget cuts hurt European growth? Will Europe’s crisis hurt U.S. companies? Will contagion spread through the global financial system?”
The euro dropped 2.5 percent to $1.1967 in New York, from $1.2273 on May 28. It touched $1.1956, the lowest level since March 2006. The 16-nation currency fell 1.6 percent to 109.98 yen, the biggest drop in three weeks, from 111.77. The dollar gained 0.9 percent to 91.90 yen, from 91.06 yen last week.
Hungary is in a “grave situation” because the previous government “lied” about the economy, Peter Szijjarto, a spokesman for Prime Minister Viktor Orban, said yesterday. Hungary, whose forint tumbled 4 percent yesterday versus the dollar, needed a $24 billion bailout to avert default in 2008.
Reminder of Greece
“While Hungary is not the biggest economic power in the world, it reminds us so much of Greece,” said Dan Cook, senior market analyst at IG Markets Inc. in Chicago. “It creates a lot of concern, focused on the euro.”
The cost to protect against default on Spanish government debt yesterday rose to a record 295.5 basis points, according to CMA DataVision prices. Credit-default swaps on Portugal were up 26 basis points to 364.8, and Italian swaps rose 30 basis points to a record high 264. The swaps pay a buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
‘Disappointed the Market’
“It was a weak payrolls report that significantly disappointed the market,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “It calls into question the thesis that the U.S. will be a pillar of support for global growth.”
U.S. retail sales rose 0.2 percent in May after gaining 0.4 percent in April, according to the median forecast in a Bloomberg survey of economists. The Commerce Department reports the data on June 11.
Australia’s dollar dropped 1.9 percent to 75.67 yen and South Africa’s rand fell 1.1 percent to 11.80 yen on speculation the debt crisis will force traders to unwind carry trades, in which they borrow money in countries with low interest rates to invest in higher-yielding assets. Japan’s 0.1 percent benchmark makes the yen a popular choice for funding such transactions.
Europe’s banks will have to write off 195 billion euros ($237 billion) of bad debts by 2011, the European Central Bank said on May 31. CNBC reported yesterday that Societe Generale SA was the subject of unconfirmed rumors of a derivatives loss. The bank declined to comment. It is telling analysts it didn’t suffer losses on derivatives, said two people familiar with the matter who declined to be identified.
“There are tensions in European banks that are dragging down banking stocks,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “We’re in the middle of a structural asset allocation shift out of the euro.”
G-20 Finance Chiefs
Group of 20 finance chiefs meeting in Busan, South Korea, yesterday signaled they will delay introducing new rules aimed at forcing banks to raise the quality and quantity of capital they hold to buffer against financial crisis. Euro area officials voiced concern haste would hurt economic growth.
The euro has fallen 9.2 percent this year versus its developed-world counterparts, Bloomberg Correlation-Weighted Indexes show.
French Prime Minister Francois Fillon said yesterday he’s “not worried” about the current euro-dollar exchange rate. The rate “didn’t reflect reality and was penalizing our exports,” he told reporters in Paris.
‘Tried-and-True Method’
Europe wants “the currency to weaken to generate growth, increase tax revenues and inflate its way out of debt,” said Andrew Busch, a Chicago-based global currency strategist at Bank of Montreal. “It’s a tried-and-true method to deal with massive debt problems.”
The yen fell for a second week versus the greenback after Japan’s parliament approved making Naoto Kan the nation’s next leader, replacing Yukio Hatoyama, who resigned.
“Kan has a far more interventionist attitude regarding currencies and has expressed his view that a weaker yen is favorable,” strategists at BNP Paribas wrote in a note to clients yesterday. “The prospect of intervention to weaken the currency is increasing.”
