Euro Slides to One-Week Low as EU Rejects East Europe Aid Call

By Ron Harui

March 2 (Bloomberg) -- The euro fell to a one-week low against the dollar after European Union leaders rejected calls to back an aid package for eastern Europe, fueling concern the financial crisis will deepen the region’s recession.

Europe’s single currency dropped for a second day versus the greenback as EU leaders vetoed Hungary’s proposals for 180 billion euros ($227 billion) of loans to ex-communist economies in eastern Europe. The Dollar Index rose to a 2 1/2-year high as declines in Asian stocks stoked demand for safety. New Zealand’s dollar slid to a 6 1/2-year low as its Treasury Department said the country’s economy may shrink more than expected this year.

“There’s disappointment that nothing really concrete came out of the EU’s weekend meeting and their failure to address eastern Europe’s problems,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The bias is for the euro to be sold” to $1.2528 today, he said.

The euro fell to $1.2585 as of 3:01 p.m. in Tokyo from $1.2669 late in New York on Feb. 27. It earlier reached $1.2546, the weakest since Feb. 19. It dropped to 122.68 yen from 123.61 yen. The currency traded at 88.47 British pence from 88.51 pence.

The yen traded at 97.48 per dollar from 97.57 in New York on Feb. 27. It climbed 1.6 percent to 48.15 against New Zealand’s dollar and gained 1 percent to 61.73 versus Australia’s dollar.

Japan’s currency rose to a record high of 16.34974 against South Korea’s won from 15.77687 late in Asia on Feb. 27. The won weakened on concern that sliding exports will starve the nation of foreign exchange banks need to make payments on overseas debt.

The ICE’s Dollar Index, which tracks the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, gained to 88.822, the highest level since April 2006.

‘Very Different’

The euro declined for a second day versus the yen as EU leaders also told automakers such as General Motors Corp.’s European arm to look to national governments for help.

“I would advise against taking huge numbers into the debate,” German Chancellor Angela Merkel told reporters at an EU summit in Brussels yesterday. “I see a very different situation -- you can compare neither Slovenia nor Slovakia with Hungary.”

Government steps to stabilize the credit and money markets have “appeared to gain traction” in recent months, the Bank for International Settlements said today in its quarterly report.

At the same time, “signs of dysfunction continued,” the Switzerland-based BIS said.

The U.S. and Japanese currencies strengthened as Asian equities slumped, with the Nikkei 225 Stock Average falling 3.9 percent and the MSCI Asia-Pacific Index of regional shares dropping 3.6 percent.

“Risk aversion is re-emerging, so the dollar and the yen are being bought,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France’s third- largest bank. “Investors appear to be repatriating funds.”

Rising Volatility

Implied volatility on one-month euro-yen options rose to 24.15 percent today from 23.38 percent on Feb. 27, suggesting a greater risk of exchange-rate fluctuations that can erode profit on so-called carry trades.

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits. Japan’s benchmark interest rate is 0.1 percent, compared with 3.25 percent in Australia and 3.50 percent in New Zealand.

Australia’s central bank will lower rates to 3 percent or less at a meeting tomorrow, according to 14 of the 18 economists surveyed by Bloomberg News. New Zealand policy makers will lower benchmark borrowing costs by at least 0.75 percentage point on March 12, a separate Bloomberg News survey shows.

The Australian dollar fell 0.8 percent to 63.35 U.S. cents, and the New Zealand dollar declined 1.4 percent to 49.40 cents after touching 49.12 cents, the lowest since November 2002.

‘Big Trouble’

The dollar also rose on concerns banks will restrict lending abroad amid the global recession.

“Whenever a banking system realizes it’s in big trouble, it says, ‘I have to take care of my next door neighbors and the businesses down the block,’” said John Taylor, who manages $11.4 billion as chairman of New York-based FX Concepts Inc. “Then that currency of that country, if its banks are big in international lending like in the U.S., will strengthen.”

Evidence of so-called financial protectionism surfaced last week. Stephen Hester, chief executive officer of Royal Bank of Scotland Group Plc, said Feb. 26 that the U.K.’s largest government-controlled bank will cut back or withdraw from 36 of 54 countries where it operates to focus on its “heartland.”

‘More Unwinding’

The yen may extend its worst month in 13 years into March on speculation traders will keep reducing holdings of long positions in the currency that bet on a rise in the exchange rate, according to Standard Chartered Plc.

“With the yen continuing to weaken, we would expect to see more unwinding of yen long positions in the coming weeks,” analysts led by Callum Henderson, Singapore-based head of global currency strategy at Standard Chartered, wrote in a research note today.

Figures from the Washington-based Commodity Futures Trading Commission showed on Feb. 27 the difference in the number of wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called net longs -- was 28,635 on Feb. 24, compared with net longs of 36,188 a week earlier.

Japan’s currency weakened 7.9 percent versus the dollar in February, the poorest month since August 1995.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net