By Yasuhiko Seki and Ron Harui
Feb. 17 (Bloomberg) -- The euro fell to a 10-week low against the dollar after Moody’s Investors Service said it may downgrade a number of banks with units in Eastern Europe, adding to concern financial turmoil in the region is worsening.
The euro also weakened against 14 of the 16 major currencies on speculation its recent declines triggered the execution of automatic sell orders. The yen dropped to a five- week low against the dollar after Japan’s Finance Minister Shoichi Nakagawa said today he would resign after budget bills are passed in the nation’s parliament.
“The financial turbulence in central and Eastern Europe is likely to persist,” said Masafumi Yamamoto, head of foreign- exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former Bank of Japan currency trader. “The markets may perceive this as a factor to sell the euro.”
The euro declined to $1.2645 as of 1:39 p.m. in Tokyo, from $1.2801 late yesterday in New York. It touched $1.2633, the lowest since Dec. 5. The European currency dropped to 117.02 yen from 117.46 yesterday. The dollar rose to 92.53 yen from 91.73 yesterday, after touching 92.75 yen, the lowest since Jan. 8.
Nakagawa’s decision to resign comes after television footage showed him slurring his speech at a briefing following the Group of Seven meeting of finance ministers and central bankers in Rome on Feb. 14. The resignation is a setback to Prime Minister Taro Aso, whose approval rating has slid to the second lowest on record for a leader.
Japan Concern
“Nakagawa’s resignation seems to be spurring concern over the world’s second-largest economy,” said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly listed lender. “The market is short the dollar and long the yen, so there’s a bias to buy back the U.S. currency and sell Japan’s.”
The yen may fall to 93 per dollar today, Takashima said.
East European banks, which are mainly subsidiaries of financial institutions such as Raiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” which may also weaken their parent companies, Moody’s wrote in a report released today in London.
West European banks might become selective in supporting their subsidiaries and “banks in countries that are associated with higher systemic risks might face reduced support,” Moody’s said. Western governments may also establish rules to ensure banks receiving state support do not aid foreign subsidiaries, the company said.
Dollar Gains
The Moody’s report “helped push euro down below 1.27 and accelerated dollar gains across the board,” said Callum Henderson, head of global currency strategy at Standard Chartered in Singapore. The euro needs to find support at $1.2330, the weakest since April 2006, which it touched in October, he said.
The euro’s decline against the dollar and the yen accelerated after stop losses on investors’ long positions on the currency were activated, said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore.
“The stop losses were probably around $1.2720 and $1.2700 in euro-dollar and about 116.80 in euro-yen,” Lee said. A stop loss is an automatic instruction to sell a currency should it reach a particular level. A long position is a bet that an asset will rise.
British Pound
The pound dropped on concern a U.K. report today will show inflation slowed due to the economic slump, giving the Bank of England more room to cut interest rates. The Office for National Statistics may say consumer prices rose 2.7 percent in January from a year earlier, compared with 3.1 percent the previous month, according to a Bloomberg News survey.
The report comes after the Confederation of British Industry said yesterday that gross domestic product will shrink 3.3 percent in 2009, the most in almost 30 years, instead of the 1.7 percent predicted in November.
“Spreading economic woes in greater Europe, which also enhances expectations for more rate cuts there, may send the pound to a year-to-date-low of $1.350,” said Shigeru Nakane, a foreign-exchange dealer at Resona Bank Ltd., a unit of Japan’s fourth-largest banking group.
Buying Treasuries
The dollar also rose toward a five-week high against the yen on speculation Japanese investors will seek the relative safety of U.S. Treasuries amid increasing signs the word’s second-largest economy is faring worse than the U.S.
A Japanese government report yesterday showed the economy shrank 3.3 percent last quarter from the previous three months, compared with the U.S.’s 1 percent contraction. A separate report last week showed Japan’s current-account surplus narrowed by the most in at least 23 years in December, diminishing the appeal of the yen as a haven currency.
“The severe downturn may induce Japanese investors to put their money into Treasuries as a haven,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The dollar will probably be bought.”
Treasuries rose, extending last week’s gains. The yield on the benchmark 10-year note fell nine basis points to 2.81 percent, according to BGCantor Market Data. A basis point is 0.01 percentage point.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.
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