Euro Falls for Second Day After Merkel’s Party Defeated; Dollar Advances
Euro Drops After Leaders Failed Solidify Bailout Mechanism
Chris Ratcliffe/Bloomberg
The euro fell against the dollar and the yen for a second day after European Union leaders failed to solidify a permanent bailout mechanism during a summit at the end of last week.
The euro fell against the dollar and the yen for a second day after European Union leaders failed to solidify a permanent bailout mechanism during a summit at the end of last week. Photographer: Chris Ratcliffe/Bloomberg
March 25 (Bloomberg) -- Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., talks about the European debt crisis and currency markets. He speaks with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
March 24 (Bloomberg) -- Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co., and Gerard Lyons, chief economist at Standard Chartered Bank, discuss the European debt crisis and the outlook for the euro. They speak with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
The euro weakened for a second day against the dollar after German Chancellor Angela Merkel’s coalition was defeated in its southwestern heartland, clouding the political outlook for Europe’s biggest economy.
The single currency snapped a two-day gain versus the Swiss franc after European Union leaders cut the startup capital for a program of future emergency aid, stoking concern efforts to quell the debt crisis will be insufficient. The dollar strengthened to a one-week high versus the yen before a report that economists said will show U.S. consumer spending increased for an eighth month in February.
“It’s a double whammy for the euro,” said Kurt Magnus, executive director of currency sales in Sydney at Nomura Holdings Inc., Japan’s biggest brokerage. “All political instability weighs on currencies.”
The euro declined to $1.4054 as of 11:36 a.m. in Tokyo from $1.4088 last week in New York, after sliding 0.6 percent on March 25. It earlier dropped to $1.4021, the weakest level since March 18. The common currency rose to 114.78 yen from 114.68 yen. The dollar gained 0.3 percent to 81.61 yen after reaching 81.65 yen, the strongest since March 18. The greenback advanced 0.2 percent to $1.6015 per pound.
German Election
Merkel’s Christian Democratic Union won 39 percent of the votes in yesterday’s election in Baden-Wuerttemberg, its worst result since 1952, while its Free Democratic Party allies won 5.3 percent, according to the state election website. That leaves the two parties short of a majority and marks the end of the CDU’s 58-year state rule. The opposition Greens took a record 24.2 percent, while the Social Democrats, who say they will form a coalition with the Greens, won 23.1 percent.
EU leaders last week pared the emergency-aid fund’s paid-in capital as of 2013 to 16 billion euros ($22.5 billion), less than the 40 billion euros foreseen in a March 21 accord. The announcement came after Portugal’s credit rating was cut last week by Standard & Poor’s Ratings Services and Fitch Ratings, while Ireland is seeking to renegotiate the terms of last year’s bailout accord.
The dollar gained for a third day versus the yen on optimism the recovery in the world’s largest economy is gaining momentum. U.S. consumer spending rose 0.5 percent in February, after increasing 0.2 percent the prior month, according to a Bloomberg survey before today’s Commerce Department report.
Federal Reserve policy makers should review whether to complete a second round of quantitative-easing purchasing due to end in June because of strong U.S. economic data, St. Louis Fed President James Bullard said March 26. Philadelphia Fed President Charles Plosser and Richmond Fed President Jeffrey Lacker have urged a review of the bond purchases in light of an improving economy and concern over future inflation.
Fed Hawks
“Strong U.S. data would add credence to the Fed hawks’ view that the central bank’s super-accommodative stance needs a re-think,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Such a scenario would provide fundamental support to the dollar.”
The yen dropped against all 16 of its major counterparts on speculation Japan will be among the last of the major economies to raise interest rates.
The BOJ will increase its benchmark rate by two basis points over the next 12 months, compared with 37 basis points of increases by the Fed, Credit Suisse Group AG indexes show.
The extra yield investors demand to hold two-year Treasuries instead of similar-dated Japanese notes widened to 55 basis points, the most since Feb. 16, on speculation the Fed will end quantitative easing earlier than the Bank of Japan.
‘Look Solid’
“Recoveries of economies in the U.S. and elsewhere look solid,” said Yuji Saito, director of the foreign-exchange department at Credit Agricole Corporate and Investment Bank in Tokyo. “Sentiment is likely to be risk on, so the yen will probably be sold.”
The yen has weakened versus 13 of its 16 major counterparts this quarter, falling the most against the euro and the Danish krone, as the Group of Seven nations intervened to bring down the yen from a postwar high.
The Swiss franc has become the only haven in the foreign- exchange market as the Group of Seven weakens the yen and the Federal Reserve floods the U.S. financial system with dollars.
The franc has surged 7.7 percent in the past year, the most among the 10 most-widely traded currencies tracked by the Bloomberg Correlation-Weighted Indexes. Not even the cash spent by Switzerland’s central bank last year to curb the franc’s strength was enough to keep it from appreciating more than 18 percent against the euro.
“The franc has become the ultimate safe haven,” said Audrey Childe-Freeman, head of European currency strategy in London at JPMorgan Chase & Co. “In a world where there are question marks against both the dollar and the euro and an environment that will be choppy for the yen in the context of intervention, the franc seems to be the best bet.”
The franc gained 0.1 percent to 1.2945 per euro.
To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
To contact the editors responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net.
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