Euro Falls on Socrates Resignation After Portugal Budget-Cut Plan Defeated

The euro slumped against most of its major counterparts as Portugal’s parliament rejected a deficit-cutting plan and the country’s debt yields reached record highs.

The 17-nation currency fell for a second day against the dollar after the vote that led Portuguese Prime Minister Jose Socrates to resign, fueling speculation that the nation will take a European bailout. The yen strengthened against most of its major counterparts as Luxembourg Prime Minister Jean-Claude Juncker said Europe, the U.S. and the Group of Seven are “ready” to act to curb the currency’s rise.

“We’re interpreting it as a euro-negative”, said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., after the vote in Portugal. “Many expected it, although the market in general was surprised.”

The euro fell 0.8 percent to $1.4088 at 5 p.m. in New York, from $1.4196, after gaining as much as 0.1 percent. It sank 0.8 percent to 114 yen from 114.95. The yen rose 0.1 percent to 80.92 per dollar from 80.97.

Yields on Portuguese two-year debt rose 10 basis points, or 0.1 percentage point, to 6.06 percent, after touching a record 6.683 percent.

The Dollar Index, which tracks the U.S. currency against six major peers, rose 0.7 percent to 75.936 as western allies continued attacks Libyan leader Muammar Qaddafi’s ground forces. It touched a 15-month low of 75.249 yesterday.

‘Wrong Direction’

Demand for Japanese debt rose as radiation levels at Japan’s Fukushima Dai-Ichi nuclear power plant hampered efforts to repair reactors.

The yen rose against most major currencies even after Jean- Claude Juncker said the Japanese currency is “slowly moving in the wrong direction,” while speaking in Luxembourg today. The G-7 nations intervened March 18 to bring the currency down from a postwar high.

Juncker also said March 21 his “personal guess” is that the EFSF would be decided in June and would increase guarantees. The decision won’t be made by the end of this week’s meeting of policy makers, Reuters reported citing a draft document.

EU leaders are divided about how to get the euro-region stopgap fund up to its full capacity of 440 billion euros ($624 billion) to ease credit woes. European leaders pushed back the decision on funding a regional bailout mechanism to June.

Euro Moves

Portugal has been on the radar screen, but the statement that was most damaging is that the EFSF was put off to the end of June,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “Everything we heard and seen for the last three months was telling us that everything would be wrapped up this weekend and now it’s not.”

Work thrashing out a solution to the region’s credit woes is due to culminate at a March 24-25 summit of European leaders.

The Portuguese parliament backed a resolution against the government’s stability and growth program, Jaime Gama, the parliament’s president, said in Lisbon today. After the vote, Socrates said he presented his resignation after parliament.

The pound fell against all its major counterparts after the Bank of England minutes showed policy makers voted 6-3 to keep rates steady on March 10 and saw “merit in waiting” to assess the effect of higher oil prices on the economy.

Pound Falls

The pound declined 0.8 percent to $1.6235. Sterling reached $1.6401 yesterday, the highest since January 2010, after inflation data surpassed forecasts and spurred bets on interest- rate increases.

Chancellor of the Exchequer George Osborne said the British economy will more grow more slowly this year than previously forecast.

The Office for Budget Responsibility predicts annual growth in 2011 of 1.7 percent, down from the 2.1 percent forecast in November, Osborne said. The chancellor said he will stick to his deficit-reduction plan as he announced the revised forecasts in his budget speech in the House of Commons in London today.

The Australian dollar rose against all of its most-traded peers before the nation’s central bank releases its twice-yearly Financial Stability Review today.

Australia’s dollar rose 0.3 percent $1.0131, from $1.0103 yesterday. The Aussie is the best performer against nine developed-market currencies in the past week, rising 3 percent, according to Bloomberg Correlation-Weighted Indexes.

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

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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