By Masaki Kondo and Candice Zachariahs - Dec 19, 2011 3:43 PM GMT+0700
Dec. 19 (Bloomberg) -- Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics in Washington, talks about Europe's sovereign debt crisis. European finance ministers today will seek to meet a self-imposed deadline for drawing additional aid to the crisis and to form new budget rules as investor confidence that a comprehensive solution is achievable wanes. Kirkegaard speaks with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)
The dollar rose against most major peers after North Korean state television said national leader Kim Jong Il died, spurring concern instability may increase in the region and boosting demand for the U.S. currency as a haven.
The South Korean won tumbled to a two-month low as the nation boosted border and coastal defenses and considered raising alert levels for the military after Kim’s death. The yen dropped against the dollar for the first time in three days amid concern a destabilization of the Korean peninsula will dim the outlook for Japan’s economy and security. The euro slid before France and Spain sell bills this week amid concern the region’s largest economies will have their credit ratings cut.
“We’ve now gone to a situation where the U.S. dollar is seen as the global currency of almost like a last haven,” said Tim Riddell, head of global markets research at Australia & New Zealand Banking Group Ltd. in Singapore. “There are an awful lot of risks and fragilities within North Korea, which are going to be heightened by the transition.”
The dollar strengthened 0.2 percent to $1.3025 per euro as of 8:32 a.m. in London from the close in New York on Dec. 16. The greenback added 0.2 percent to 77.88 yen. Europe’s common currency was little changed at 101.45 yen.
The won weakened 1.4 percent to 1,174.80, earlier touching 1,179.95, the weakest level since Oct. 7.
Kim, 70, died on Dec. 17 of exhaustion brought on by a sudden illness while on a domestic train trip, the official Korean Central News Agency said. Kim probably had a stroke in August 2008 and may have also contracted pancreatic cancer, according to South Korean news reports.
Succession
The likely succession of his little-known third son, Kim Jong Un, threatens to trigger a dangerous period for the Korean peninsula, where troops from the two Koreas and the U.S. square off every day. A government statement called on North Koreans to “loyally follow” Kim Jong Un.
Japan would hold a security meeting and Prime Minister Yoshihiko Noda canceled a public event scheduled for today, ruling party lawmaker Yosuke Kondo told reporters in Tokyo. t on regional security.’’ The Stoxx Europe 600 Index (MXAP) of shares retreated 0.5 percent and the MSCI Asia Pacific Index of fell 1.8 percent.
“Because of its geographical proximity, if this incident destabilizes North Korea, South Korea and Japan won’t remain unscathed,” said Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG. “People can’t buy the yen for risk aversion.”
Safe Havens
The yen’s decline today against the dollar trimmed to 4.2 percent its gain this year as investors have sought the safest investments amid Europe’s sovereign-debt crisis. The yen usually strengthens during periods of financial stress because its export-reliant economy doesn’t need foreign capital to balance the current account -- the broadest measure of trade.
Japan’s currency has advanced 4.8 percent this year against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Indexes. The dollar is the next-best performer, advancing 1.7 percent, while the euro has depreciated 0.8 percent this year.
The euro fell for the first time in three days against the dollar before France is scheduled to sell as much as 7 billion euros ($9.1 billion) of bills today. Spain will auction government securities tomorrow maturing in three and six months.
Fitch Ratings lowered its outlook for France’s credit ranking to negative from stable on Dec. 16, saying the country’s budget deficit and government borrowings make it more vulnerable to the region’s debt crisis than other top-rated euro-zone countries. The ratings company separately placed other European nations, including Spain and Italy, on review for a downgrade.
‘Immense’ Euro Pessimism
“The main focus is France and the pretty decent expectation that they will lose the AAA rating, and that would still hurt the euro,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, Australia’s second-largest lender. “There’s an immense amount of pessimism around for the euro.”
The 17-nation European currency has depreciated 2.7 percent versus the dollar this year and 6.5 percent against the yen.
Futures traders increased bets that the euro will decline against the dollar to a record level, Commodity Futures Trading Commission data show. Hedge funds and other large speculators had 116,457 more bets the currency will fall versus the dollar than gain in the five-day period ended Dec. 13, compared with 95,814 a week earlier.
Short-Term Gain
Positioning has reached “elevated levels” and the euro “may be vulnerable to a short-term correction higher as some of that positioning comes under pressure,” said John Horner, a currency strategist at Deutsche Bank AG in Sydney.
“The bulk of the decline in euro against the dollar has likely been seen as markets have priced in the weaker outlook and more dovish policy from the European Central Bank,” he said.
European finance ministers will hold a conference call today to discuss 200 billion euros in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.
To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
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