Euro Declines as European Leaders Withhold Aid Before Greece’s Referendum

By Kristine Aquino - Nov 3, 2011 12:37 PM GMT+0700

The euro declined, trading 0.8 percent from a three-week low against the dollar, as European leaders said Greece will vote next month to determine whether it will stay in the 17-nation currency.

The euro dropped for a third day versus the yen after French President Nicolas Sarkozy said Greece won’t receive a “single cent” in aid without holding to the terms of its bailout agreement. The dollar and yen gained against most of their 16 major counterparts as Asian stocks declined, boosting investor appetite for safer assets. New Zealand’s dollar fell after its unemployment rate increased.

“I can’t come up with a plan to allow Greece to leave the euro, not without experiencing intense capital flight,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “I don’t think there’s anything here to make the euro bounce. The risks certainly point in the direction of weakness.”

The euro declined 0.2 percent to $1.3714 at 1:32 p.m. in Singapore from $1.3747 yesterday in New York. It fell to $1.3609 on Nov. 1, the lowest since Oct. 12. The currency lost 0.3 percent to 107 yen. The dollar was little changed at 78.02 yen. New Zealand’s dollar slid 0.9 percent to 78.47 U.S. cents.

The MSCI Asia Pacific excluding Japan Index of stocks dropped 1.5 percent. Japanese markets are closed today for a holiday.

Surrender All Aid

Crisis talks ended in the French resort of Cannes yesterday with German Chancellor Angela Merkel and Sarkozy withholding 8 billion euros ($11 billion) of assistance to Greece and warning it will surrender all European aid if the nation votes against a bailout package agreed last week. A Group of 20 summit is also set to begin today in Cannes.

The hardball tactics open the door for the first time for a country to leave the 12-year-old currency bloc. Greek Prime Minister George Papandreou defended his decision to call a referendum, telling reporters at a separate briefing that Greece “needs a wider consensus” for the bailout terms and expressing confidence it will back staying in the euro.

More than seven in 10 voters said they favored Greece remaining in the euro, a poll last week of 1,009 people published in To Vima newspaper showed.

The euro also slid before European Central Bank President Mario Draghi chairs a policy meeting today for the first time, amid speculation the bank will lower borrowing costs to stem recession risks in the region.

‘Absolutely Essential’

“It is absolutely essential that the ECB cuts rates,” Westpac’s Rennie said. The Australian lender “is forecasting that the ECB starts that process today. Failure to do so would further undermine the outlook for the European economy and should weigh on the euro.”

The euro region’s central bank will keep its key rate at 1.5 percent, according to 49 of 55 economists surveyed by Bloomberg News. Four predict a 25-basis-point cut, or 0.25 percentage point, and two are forecasting a reduction of 50 basis points.

“In the immediate term, it’s going to be a risk-on, risk- off type of environment,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking in Singapore. “The dollar remains a key safe haven.”

The dollar tends to strengthen in periods of financial turmoil because it is the world’s reserve currency. The yen benefits as its current-account surplus makes Japan less reliant on foreign capital.

Fed Stimulus

The greenback declined against most of its major peers yesterday after Federal Reserve Chairman Ben S. Bernanke said the prospect of additional stimulus “remains on the table,” boosting speculation the bank is heading towards a third round of asset purchases, or quantitative easing.

Bernanke spoke at a press conference yesterday after members of the Federal Open Market Committee kept policy unchanged, saying they would lengthen the maturity of the central bank’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013.

The committee also cut its 2012 growth forecasts and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

The Fed hasn’t ruled out further quantitative easing, said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interdealer broker. “You’ve got to be, in any period, bearish on the U.S. dollar.”

N.Z. Jobless

New Zealand’s currency weakened after a statistics bureau report showed the unemployment rate unexpectedly rose to 6.6 percent in the third quarter from 6.5 percent in the previous period. Economists surveyed by Bloomberg had forecast a rate of 6.4 percent.

“The headline number looks very weak and that’s pushed the kiwi lower,” said Mike Burrowes, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Things are probably going to remain more volatile, more fickle and less focused on domestic fundamentals and more about what’s going to happen with the European debt crisis and global growth.”

In Christchurch and the surrounding Canterbury region, where the earthquakes struck, employment fell 26,800, or 8 percent, from the year-earlier quarter, led by retailing, the statistics agency said.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Nate Hosoda at nhosoda@bloomberg.net