Euro Tumbles in Longest Losing Stretch in 18 Months as Debt Crisis Spreads

By Allison Bennett - Nov 26, 2011 12:00 PM GMT+0700

The euro slid for a fourth week, its longest losing streak versus the dollar in 18 months, as Germany’s struggle with a bond auction signaled Europe’s debt crisis is touching the region’s most fiscally sound nations.

The 17-nation currency fell for a third week against the yen as Belgium’s credit rating was downgraded and before the nation auctions securities next week, including 10-year debt. Italy and France will also sell bonds next week. The dollar gained against all of its most-traded peers after Congress’s budget supercommittee failed to reach agreement on cutting the U.S. deficit, sending investors to the safety of Treasuries.

“The conditions in the foreign-exchange market caught up this week with the conditions in the credit market,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, said yesterday. “Before, there was a lot of selling of periphery paper for core paper. But if Germany goes, there’s no more core paper to buy -- the capital leaves the euro area.”

The euro dropped 2.1 percent to $1.3239 yesterday in New York, from $1.3525 on Nov. 18. It last fell for four weeks in May 2010. The shared currency sank 1.1 percent to 102.91 yen. The greenback gained for the first time in three weeks against the Japanese currency, appreciating 1.1 percent to 77.73 yen.

Benchmark U.S. 10-year note yields fell five basis points, or 0.05 percentage point, to 1.96 percent, their first close below 2 percent in eight weeks, as investors sought refuge.

Seven-Week Low

The euro touched a seven-week low against the dollar yesterday after Italy sold 8 billion euros ($10.6 billion) of 183-day bills at a rate of 6.504 percent, the highest since August 1997. The auction came two days after Germany, Europe’s biggest economy, missed its 6 billion-euro maximum sales target at a 10-year bond auction by 35 percent.

German Chancellor Angela Merkel again rejected calls for joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis. Merkel, who spoke Nov. 24 at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France, said euro bonds would lead to a convergence of interest rates in the region. German 10-year debt yielded 2.26 percent yesterday, while comparable Italian government bonds yielded 7.26 percent.

“This crisis isn’t specific to the periphery any more, and there is this constant reminder that officials don’t have any real solution on the table,” Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage, said yesterday. “There is mounting concern about officials and their ability to get a handle on the crisis.”

Basis Swaps

The cost for European banks to fund in the U.S. currency reached the most expensive level since October 2008. The three- month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, swelled to as much as 1.61 percentage points below the euro interbank offered rate.

Goldman Sachs Group Inc. recommended on Nov. 23 that investors end a money-losing bet that the euro would gain against the dollar after Greece and Italy got new governments.

The close of the recommendation translated to a potential loss of about 2.3 percent, Thomas Stolper, Goldman’s London- based chief foreign-exchange strategist, wrote in a client note.

Belgium had its credit rating lowered one step to AA by S&P, which said bank guarantees, political instability and slowing economic growth will make it difficult to reduce the nation’s debt load. The action by S&P is the first downgrade for Belgium in almost 13 years.

“Selling the euro on rallies is the ultimate fundamental trade you want to have before we get a real resolution,” Greg Salvaggio, senior vice president of capital markets at the currency-trading firm Tempus Consulting Inc. in Washington, said on Nov. 22.

Yen Performance

The yen was the third-best performer among the dollar’s 16 most-traded counterparts tracked by Bloomberg, after the Taiwanese dollar and Singapore’s dollar.

The Japanese currency had its biggest five-day loss against the dollar since Nov. 4, the week the Bank of Japan intervened and sold yen to curb gains that were hurting exporters. The dollar may strengthen more than 20 percent to as high as 94 yen should it climb above key resistance levels, where sell orders may be clustered, at 83.30 and 85.50, Neuchatel, Switzerland- based MIG Bank said, citing trading patterns.

The congressional supercommittee’s failure to reach an accord on budget-deficit reductions extended partisan gridlock into the 2012 election year and set the stage for $1.2 trillion in automatic spending cuts.

The U.S.’s credit ratings and outlook weren’t affected by the panel’s failure, Standard & Poor’s said. The company stripped the U.S. of its top AAA credit rating Aug. 5, cutting the rating to AA+ after political gridlock on deficit cuts.

Krona Biggest Loser

The dollar surged 2.3 percent this week against nine developed-nation counterparts tracked by Bloomberg Correlation- Weighted Currency Indexes. Japan’s currency rose 1.1 percent, the euro slipped 0.1 percent and Sweden’s krona was the biggest loser, falling 1.3 percent.

The Swedish currency sank after central-bank Deputy Governor Barbro Wickman-Parak said Nov. 22 at a seminar the nation’s policy makers may cut interest rates if Europe’s debt crisis persists. Two days later, the Riksbank announced Sweden’s biggest banks will need to target tougher capital standards than those set by international regulators.

The krona depreciated 3.2 percent to 7.0063 versus the dollar in its biggest weekly loss since Sept. 23. It declined 1.1 percent against the euro to 9.2747.

Currencies of commodity-producing nations tumbled after the HSBC Flash Manufacturing purchasing-manager index for China declined to 48 this month, predicting the biggest contraction since March 2009. The Australian dollar fell for a fourth week, losing 3 percent to 97.11 U.S. cents. China is Australia’s biggest trading partner.

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net