Dollar Gains Versus Most-Traded Counterparts as Stocks Tumble; Euro Drops
May 23 (Bloomberg) -- Geoffrey Yu, a currency strategist at UBS AG, talks about the outlook for the dollar and Federal Reserve monetary policy. He also discusses the impact of the European debt crisis on the euro and his top trade. Yu speaks with Bloomberg's Oliver Joy. (Source: Bloomberg)
The dollar rose versus all of its 16 most-traded peers as deepening concern that Europe’s sovereign- debt crisis will worsen sent stocks tumbling and Wall Street’s so-called fear gauge to the highest level in two months.
The euro tumbled to a record low against the Swiss franc and dropped to the weakest level in two months versus the greenback as Italy faced a possible credit-rating cut and Spain’s ruling party was routed in local voting. Australia’s currency was among the worst performers versus the U.S. dollar after a Chinese manufacturing gauge fell to a 10-month low.
“We’ve moved a notch above looking at Portugal, Greece and Ireland and are evaluating prospects for what are the relatively stronger nations of Spain and Italy,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. “In terms of impact on the commodity- sensitive currencies, Chinese manufacturing is up on the agenda as an uncomfortable fundamental for the bigger picture.”
The dollar strengthened 0.8 percent against the euro to $1.4048 at 5 p.m. in New York, from $1.4161 on May 20. It gained as much as 1.4 percent to touch $1.3970, the strongest level since March 17. The greenback appreciated 0.4 percent versus the yen to 82.01, from 81.70.
The euro slipped 0.1 percent to 1.2415 francs after earlier reaching 1.2324, the weakest level since its 1999 debut. It dropped 0.4 percent to 115.20 yen, from 115.69 yen on May 20.
Decline for Week
Europe’s shared currency declined 0.6 percent over the past week, according to Bloomberg Correlation-Weighted Currency Indexes, which track 10 developed-nation currencies. The greenback gained 0.2 percent and the franc, perceived as a refuge currency, was up 0.4 percent.
The VIX, the index of market volatility nicknamed the fear gauge, climbed as much as 15 percent to 20, the highest level since March 23. Stocks dropped, with the Standard & Poor’s 500 Index losing 1.2 percent. Implied volatility among currencies of the Group of Seven nations jumped 2.7 percent, the biggest increase on a closing basis since March 16.
Bonds tumbled in Ireland, Portugal, Greece, Spain and Italy, pushing yields up. The 10-year Greek security’s yield climbed to 17.07 percent, and the Irish 10-year yield touched 10.88 percent, both euro-era records.
“The bond market is the only language that policy makers will listen too,” said Axel Merk, president and chief investment officer of Palo Alto, California-based Merk Investments LLC in a Bloomberg Television interview on “In the Loop” with Betty Liu. “Once the bond market imposes austerity on the country, that’s when policy makers follow through.”
Bailout Renegotiation
Wolfgang Franz, head of German Chancellor Angela Merkel’s council of economic advisers, said the euro region’s permanent rescue fund needs to be renegotiated. He spoke at a conference in Vienna.
Spanish voters punished Prime Minister Jose Luis Rodriguez Zapatero’s party yesterday for soaring unemployment and spending cuts that aimed at shielding the nation from Europe’s debt crisis. S&P on May 20 cut Italy’s credit-rating outlook to negative from stable, citing slowing economic growth and “diminished” prospects for a reduction of government debt.
The European Central Bank will accept Greece’s government bonds as collateral in its refinancing operations as long as the country’s consolidation program stays on track, Ewald Nowotny, an ECB Governing Council member, told reporters in Vienna today. Officials said last week it may not be able to take Greek sovereign debt as collateral if bond maturities are extended.
‘Considerable’ Risks
“With the authorities still seemingly divided over how to proceed with the debt crisis, there remain considerable short- term risks for the euro,” Derek Halpenny, European head of currency research Bank of Tokyo-Mitsubishi UFJ Ltd. in London wrote in a client note today.
The euro may extend its decline against the dollar as long as it trades below a so-called key resistance level of $1.4373, according to JPMorgan Chase & Co. Resistance is an area on a chart where sell orders may be clustered.
The yen was one of the best performers after the dollar among the most-traded currencies tracked by Bloomberg as the preliminary purchasing managers’ index for China compiled by HSBC Holdings Plc and Markit Economics fell to 51.1 in May. It was 51.8 in April. A number above 50 indicates expansion.
The Australian dollar slid 1.5 percent to $1.0505 and touched $1.0479, the weakest since April 19. It fell 1.1 percent to 86.13 yen. China is Australia’s biggest trading partner.
‘Counts as Quality’
“The dollar counts as quality today, and it’s more of a risk-aversion trade than a safe haven in anticipation that this European problem is going to take quite a while to solve, with an outcome that is quite uncertain,” said Fabian Eliasson, head of U.S. currency sales in New York at Mizuho Financial Group Inc. “China is obviously a huge catalyst in terms of the world economy.”
The Mexican peso fell the most in more than a week versus the greenback as speculation Europe’s debt crisis will worsen cut demand for emerging-market assets. The currency slid as much as 0.9 percent, the most on an intraday basis since May 13, to 11.7523 per dollar before trading at 11.7443, down 0.8 percent.
South Africa’s rand was the worst performer against the dollar among its most-traded counterparts, sinking 1.6 percent to 7.0286 per greenback.
To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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