Euro Heads for Third Straight Weekly Drop as Sovereign Debt Crisis Spreads

By Candice Zachariahs and Masaki Kondo - Nov 18, 2011 6:45 AM GMT+0700

The euro is poised for its third straight weekly drop against the dollar on concern European policy makers can’t halt the spread of the region’s debt crisis to larger economies including Spain, Italy and France.

The 17-nation currency was within 0.3 percent of a five- week low versus the yen amid discussions between Greece’s government and banks on terms of a voluntary debt swap that is part of the country’s international bailout agreement. Spain is scheduled to hold an election on Nov. 20. Australia’s dollar dropped over the past five days as investors shunned higher- yielding assets on concern global growth will slow. The yen rose against all 16 major peers this week on demand for haven assets.

“The widening in European bond spreads even among the core countries is a signal that currency risk within the euro zone is rising and has spread,” said Richard Yetsenga, global head of foreign-exchange strategy at Australia & New Zealand Banking Group Ltd. “The euro is going to stay under pressure.”

The euro traded at $1.3464 as of 8:33 a.m. in Tokyo from $1.3458 yesterday in New York and is headed for a 2.1 percent decline this week. The shared currency fetched 103.67 yen from 103.62 yesterday, when it touched 103.41 yen, matching the weakest level since Oct. 10. The dollar was little changed at 76.99 yen.

The Australian dollar was at 99.87 U.S. cents from $1 yesterday, having declined 2.8 percent since Nov. 11. It fetched 76.91 yen and is set for a weekly drop of 3.1 percent versus the Japanese currency, the most since the five days ended Sept. 23.

Higher Funding Costs

Investors drove up the funding costs of France and Spain yesterday as they sold 11.6 billion euros ($15.6 billion) of debt against a backdrop of rising benchmark bond yields. Both France and Spain will return to debt markets next week.

German Chancellor Angela Merkel yesterday rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil. Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a “snappy debt cut” as proposals that won’t work.

“If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen,” she said yesterday in Berlin.

European Central Bank President Mario Draghi speaks in Frankfurt today after saying Nov. 3 that the euro-area economy is heading toward a “mild recession” by the end of the year.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net