Yen Rises as Greek Downgrade Concern Boosts Demand for Safety

By Inyoung Hwang and Anchalee Worrachate

Feb. 25 (Bloomberg) -- The yen climbed to a one-year high against the euro as investors sought the safest currencies amid concern Greece’s credit rating will be lowered and its woes will spread to other nations in the currency group.

The yen advanced against all 16 major counterparts after Standard & Poor’s and Moody’s Investors Service said Greece faces further downgrades as early as next month amid Prime Minister George Papandreou’s struggle to cut the European Union’s largest budget deficit. The pound slid to a nine-month low against the dollar as investors bet the Bank of England will need to keep interest rates near record-low levels this year.

“The market is concerned Greece is still not behind us and could have an impact on global growth,” said Jens Nordvig, a managing director of currency research in New York at Nomura International Plc. “Unless we see more positive economic data points, there’ll be doubt that underlining growth momentum is picking up.”

The yen appreciated 1.8 percent to 119.90 per euro at 8:33 in New York from 122.03 yen yesterday. That’s the first time the currency has fallen below the 120 yen level since Feb. 24, 2009. The dollar climbed to $1.5271 per British pound, the strongest level since May 18, from $1.5408.

The euro declined to $1.3478 from $1.3538. It touched $1.3444 on Feb. 19, the lowest since May 18. The European currency has fallen 2.8 percent versus the dollar in February, heading for a third monthly loss, its longest stretch since November 2008.

Euro Carry Trades

The dollar weakened against the yen as a government report showed U.S. initial jobless claims unexpectedly increased last week.

Initial jobless claims rose by 22,000 to 496,000 in the week ended Feb. 20, the Labor Department said. The median estimate of 43 economists in a Bloomberg survey was for news claims to fall to 460,000. The dollar declined 1.2 percent to 89.07 yen, from 90.15.

The euro will become a favorite funding currency for carry trades as Greece’s crisis weighs on regional interest rates, Deutsche Bank AG said. The three-month London interbank offered rate, or Libor, for euro loans sank below 0.6 percent for the first time last week, down from more than 5 percent after the collapse of Lehman Brothers Holdings Inc. in September 2008.

“Greece’s crisis has highlighted political and structural weakness in the euro zone,” said Koji Fukaya, a senior currency strategist for Deutsche Bank in Tokyo. “First, it remains unclear whether any aid will be available. And even if any rescue plan comes out, it will take time to see if it’d work.”

The currency may slump further to $1.25, Fukaya said, a level last seen in March 2009.

Pound’s Slide

In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates, increasing sales of the borrowed currency.

Sterling also fell against 13 of its 16 most-traded peers as concern about the potential downgrades of Greek debt stirred concern Britain may struggle to tackle its own record deficit.

Bruce Stout, who runs Aberdeen Asset Management Plc’s Murray International Trust, said he’s concerned Britain’s widening debt gap will hamper economic growth.

“Sterling is being seen in the risk bucket and risk is off the agenda right now,” said Jeremy Stretch, a currency strategist at Rabobank International in London. Investors are taking bets on rate hikes “off the table,” he said.

The pound may fall to $1.50, should it drop below $1.5275, which would be a 50 percent retracement of its advance from last year’s low to its high, Stretch said, citing Fibonacci numbers.

The U.K. currency weakened 0.4 percent to 88.19 pence per euro and 1.7 percent versus the yen, to 136.49.

Rating Downgrade

The cost of protecting against default on Greek government bonds increased 10 basis points to 392, the highest in more than two weeks, according to CMA DataVision prices.

“We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement late yesterday. Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in Tokyo today Greece faces a downgrade of “a couple of notches” within a few months.

S&P, Moody’s and Fitch Ratings downgraded Greece’s credit rating in December as its deficit approached 13 percent of gross domestic product. Germany has denied that there are concrete plans to aid Greece, and former European Central Bank Chief Economist Otmar Issing said yesterday granting assistance would “open the flood gates” for other euro-area nations with soaring deficits.

Moody’s rating of Greece is the sixth highest, two notches above the BBB+ held by Standard & Poor’s and Fitch Ratings.

If Moody’s cuts its credit rating to the same level as the other major ratings companies it could exacerbate Greece’s financial distress at the end of this year, when the European Central Bank is due to revert to old collateral rules that were loosened during the global recession. Greek government bonds would then no longer be eligible as collateral at the ECB, making it more difficult for the nation to borrow.

To contact the reporters on this story:
Inyoung Hwang in New York at
ihwang7@bloomberg.net;
Anchalee Worrachate in London at
aworrachate@bloomberg.net