Euro Falls to 14-Month Low as Credit Crisis Spreads to Europe

By Kim-Mai Cutler and Stanley White

Oct. 6 (Bloomberg) -- The euro had its biggest one-day drop against the yen since its debut in 1999 as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of coordinated action.

The 15-nation currency declined to a 14-month low against the dollar and the weakest in 2 1/2 years versus the yen after leaders meeting at the weekend avoided announcing any plan that would mirror the U.S.'s $700 billion bailout. Germany joined with banks and insurers to prevent the collapse of property lender Hypo Real Estate Holding AG and Belgium announced a revised deal to salvage Fortis. The yen jumped 5 percent versus the Australian dollar as investors cut holdings of higher- yielding assets funded in Japan, known as carry trades.

``It appears that European governments are failing to grasp the real problem and are taking reactive measures instead of dealing with the underlying situation,'' said Ian Stannard, a London-based currency strategist for BNP Paribas SA. ``The market is disappointed with the results out of weekend meetings and that's going to put the euro under increasing pressure.

The euro fell to 139.80 yen, the weakest since March 2006, before trading at 140.47 as of 7:36 a.m. in New York, from 145.11 on Oct. 3. The euro declined to $1.3605, from $1.3772. It earlier reached $1.3543, the lowest since Aug. 23, 2007. The dollar bought 103.31 yen, from 105.32, after earlier sliding below 103 for the first time in four months. The euro may fall to $1.3360 and below 137 against the yen this week, Stannard said.

Against the pound, the euro fell to 77.02 pence, the lowest since March 14. It also declined to 1.5379 Swiss francs, the weakest in more than six months.

European Bailouts

The German government and the country's banks and insurers agreed on a 50 billion-euro ($68 billion) rescue for Hypo Real Estate after an earlier bailout faltered. BNP Paribas SA, France's biggest bank, agreed to take over Fortis's units in Belgium after a government rescue failed.

``It could be difficult for the European Union to take coordinated relief actions,'' Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender, said in a Bloomberg Television interview. ``This is a risk and the currency market is focusing on this risk.''

HSBC Holdings Plc cut its forecast for European growth next year to 0.4 percent from a previous prediction of a 0.9 percent, economists led by Janet Henry wrote in a note to clients dated Oct. 3. UBS AG cut its outlook for expansion in Asia excluding Japan next year to 6.1 percent from 6.9 percent.

The yen rose to 76.56 per Australian dollar, the highest since Sept. 17, 2004. It advanced to 66.85 versus the New Zealand dollar from 69.68 and to 50.5162 against the Brazilian real from 51.5240.

Unbeatable Yen

Japan's currency was the best performer in September and the only currency to appreciate against the dollar as a credit- market collapse drove Lehman Brothers Holdings Inc. into bankruptcy and sent borrowing costs in Europe to record highs.

Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York- based Morgan Stanley is telling clients to buy the currency versus the euro and the pound.

After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $587 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007.

`Easing Cycle'

``We are in a multi year trend reversal,'' said Paresh Upadhyaya, a senior vice president at Putnam Investment LLC in Boston, who helps manage $50 billion in currency assets. ``We are going to see a global central bank easing cycle. The yen is the place to be in this environment of economic slowdown and heightened volatility.''

Futures traders increased their bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop, so-called net longs, was 43,022 on Sept. 30, compared with net longs of 31,939 a week earlier.

The dollar fell for a fourth day against the yen on speculation reports will show a deepening slump in the U.S. economy. Pending home sales fell 1.1 percent in August after a 3.2 percent decline in the previous month, according to a Bloomberg News survey. The National Association of Realtors will release the data on Oct. 8.

The U.S. Congress approved a financial-market bailout on Oct. 3, authorizing the government to spend as much as $700 billion buying troubled assets from financial institutions reeling from record home foreclosures.

Recession, Banking Crisis

Goldman Sachs Group Inc. said the U.S. economy will enter a recession ``significantly deeper'' than previously forecast, prompting the Federal Reserve to cut interest rates by at least 1 percentage point. Gross domestic product will decline in each of the next two quarters, with unemployment reaching 8 percent by the end of 2009, Goldman said in a research note.

``It's unwise to buy a currency which is both in recession and having a banking crisis,'' said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane. The dollar will weaken to $1.45 per euro over the next month, he said.

Technical analysis shows the euro may fall to $1.3380 this week, said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo.

The European currency is likely to extend last week's 5.8 percent loss as its daily moving average convergence/divergence chart is showing a sell signal, according to Suzuki. Support at $1.3380 is near the euro's 200-week moving average, he said. Support is a level where buy orders may be clustered.

``There's really not much to suggest the euro can stage a meaningful recovery right now,'' Suzuki said. ``It's been caught in a wave of panic selling and the charts show it can go lower still.''

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net