Euro Falls to Lowest Level Since Lehman Collapse as Breakup Concern Grows

The euro fell to its lowest level since the collapse of Lehman Brothers Holdings Inc. on concern that the 16-nation currency may be headed for disintegration.

The shared currency was poised for its fourth straight weekly drop against its U.S. counterpart in the longest losing streak since February, as German Chancellor Angela Merkel said that Europe is in a “very, very serious situation.” El Pais reported that France threatened to leave the euro during talks that led to this week’s almost-$1 trillion bailout. The yen rose against all its major counterparts, including the Australian dollar, as oil retreated for a fourth day. Gold advanced as investors bought the precious metal as a haven.

“The euro is doomed,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. “It’s like a clown without its makeup. The strains among the partners are becoming clear and it’s becoming harder to see global growth not being threatened by this. The Australian dollar is tripping over this unfunny clown.”

The euro decreased 0.4 percent to $1.2447 at 10:12 a.m. in New York, from $1.2535 yesterday. It breached $1.25 for the first time since March 2009 and traded as low as $1.2424, its weakest level since November 2008. The euro fell 1.2 percent to 114.86 yen, from 116.27. The dollar traded at 92.29 yen, from 92.75.

Australia’s Dollar

Australia’s dollar fell 0.5 percent to 82.66 yen on speculation investors reversed carry trades that had profited from the nation’s 4.5 percent central bank rate. Japan’s benchmark rate of 0.1 percent makes the yen a popular funding currency for such trades. Such strategies lose money as the funding currency gains because it costs more to repay the loan.

Crude oil for June delivery fell as much as $1.68, or 2.3 percent, to $72.72 a barrel, in electronic trading on the New York Mercantile Exchange. That’s the lowest price since Feb 12.

Gold rose to $1,249.40 an ounce in London and futures reached $1,249.70 in New York, while bullion advanced to all- time highs in euros, Swiss francs and British pounds. The euro fell to its weakest level in 14 months against the dollar amid speculation that debt-cutting measures by European nations will undermine economic growth.

Speaking at a panel discussion in Munich broadcast live by Phoenix television, Merkel said that success is not yet guaranteed. ‘

Asked about disagreements with EU partners, she said that “some arguments are worth it,” without elaborating.

Report Denied

French President Nicolas Sarkozy threatened to pull out of the euro unless Merkel agreed to back the European Union’s bailout plan at a meeting last weekend in Brussels, El Pais reported, citing comments Spain’s Prime Minister Jose Luis Rodriguez Zapatero made at a meeting of socialist politicians. The Madrid-based newspaper didn’t say how it obtained the information.

Aides to Sarkozy, Merkel and Zapatero all denied the report that French president had threatened to pull out of the euro.

Europe’s currency has fallen 2.3 percent this week versus the dollar and decreased 1.5 percent against the yen after the region’s policy makers crafted an unprecedented loan package of almost $1 trillion to combat the sovereign-debt crisis.

Moody’s Investors Service said there is a “greater than” 80 percent chance it will cut its rating on Greece’s debt again as the government struggles to push through measures to reduce its budget deficit.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said Greece will require “incredible efforts” to repay its debts.

‘A Form of Meltdown’

Greece needs to be stabilized to avoid “a form of meltdown,” Deutsche Bank’s Ackermann said in the interview aired yesterday on ZDF television and posted on the German broadcaster’s website.

“I would doubt that Greece over time will be in a position to come up with the economic potential” to pay back what it owes, Ackermann said.

The euro has lost 8.6 percent this year, according to Bloomberg Correlation-Weighted Indices. The dollar has gained 6.7 percent and the yen has advanced 7.7 percent.

UBS AG, ranked by Euromoney Instituional Investor PL as the world’s second largest foreign-exchange trader, said the euro will reach $1.15 by December and $1.10 by the end of 2011, in a report dated yesterday, trimming its previous forecasts for the currency to trade at $1.30 and $1.25, respectively. ING Groep NV lowered its year-end prediction to $1.15 from $1.25, Chris Turner, head of foreign-exchange research in London, wrote in a research note today.

Parity ‘Realistic’

“You have to keep an open mind about how far the euro can fall,” Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London, said in a Bloomberg Radio interview today. Forecasts of a decline to parity against the dollar by year-end are “realistic,” Mellor said.

Sterling fell as much as 0.8 percent to $1.4497 before trading at $1.4565 as former Bank of England policy maker David Blanchflower predicted the U.K.’s governing coalition will collapse by year-end.

The U.K.’s Prime Minister David Cameron and his coalition partner, Nick Clegg, will “have a major problem keeping the left wing of the Liberal Democrats and the right wing” of the Conservatives in line, and a new election may be called before year-end, Blanchflower wrote in a Bloomberg News column today.

The pound has dropped 2.6 percent against the dollar since May 11, when the Conservatives and Liberal Democrats formed a coalition government five days after elections failed to provide a clear winner.

To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.

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