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Euro Approaches 10-Year Low Versus Yen After S&P Downgrades Italian Bonds

The euro approached a 10-year low against the yen after Standard & Poor’s cut Italy’s credit rating, adding to concern Europe’s debt crisis will raise borrowing costs for the region’s largest economies.

The 17-nation shared currency fell for a third straight day versus the dollar as Greece resumed discussions with creditors today aimed at staving off default. The dollar gained versus most of its major peers before the Federal Reserve’s policy meeting today. South Korea’s won fell to its weakest this year as Asian stocks slumped.

“Investors are still pricing in the possibility of a Greek default and that’s weighing on the euro, particularly against the dollar and yen which seem to be benefiting in this environment,” said Chris Walker, a foreign-exchange strategist at UBS AG in London. “The crisis in Europe is going to get worse before it gets better so we would recommend selling the euro at these levels. We think it’ll go to $1.30 by year-end.”

The euro was 0.2 percent lower at 104.61 yen as of 10:07 a.m. in London after reaching 103.99 yen, within 0.09 yen of the least since 2001. The shared currency was 0.2 percent weaker at $1.3664. The dollar bought 76.56 yen.

The rating for Italy, which has Europe’s second-largest debt load, was lowered to A from A+, S&P said yesterday in a statement. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

European Stocks Rise

Asian equities extended a two-week decline, with the region’s benchmark index falling 0.8 percent following news of Italy’s downgrade. The Stoxx Europe 600 Index still gained 0.7 percent led by advances in technology and construction companies.

“European stocks are a touch up; these days when it’s not downright negative it’s seen as positive,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London. “The trend is still down for the euro. We’ve predicting $1.30 for the euro by year-end and that seems to be where it’s heading.”

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit ratings cut this year. The European Central Bank last month started buying Italian and Spanish government bonds after the region’s debt crisis pushed their yields to euro-era records.

Greek Prime Minister George Papandreou’s government will hold another call with European Union and International Monetary Fund officials tonight in a bid to secure a sixth installment of rescue funds, amid concern the austerity measures demanded are deepening a three-year recession and making it harder for the government to meet its deficit goals.

‘Selling Into Rallies’

Finance Minister Evangelos Venizelos held “substantive” discussions with the officials, the finance ministry said in an e-mailed statement after a teleconference last night.

“There’s a lot of event risk for the euro and it should stay weaker over the next few weeks,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “The euro at current levels is probably quite a bit higher than what the market sees as fair value.”

Papandreou is considering holding a referendum on whether his nation should remain in the common currency, the Kathimerini newspaper said, citing people it didn’t name. Greek government spokesman Ilias Mosialos denied the report.

The dollar advanced before Fed officials begin a two-day meeting. Policy makers may decide to replace some of the short- term Treasuries in the Fed’s $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists at Wells Fargo & Co., Barclays Plc and Goldman Sachs Group Inc.

‘More Aggressive’

The Fed may go further by reducing the interest rate paid on reserves, according to Adrian Foster, head of financial- market research for Asia at Rabobank Groep NV in Hong Kong.

“Everyone is worried about all the risks, so this time around when we see a central bank actually taking more aggressive action than the average market expectation, you may get a bit of a boost to the dollar,” Foster said.

The euro pared declines against the dollar after data showed Germany’s investor confidence fell less than economists expected this month.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to minus 43.3 in September from minus 37.6 last month, the lowest since December 2008. Economists expected a drop to minus 45, according to the median estimate in a Bloomberg survey.

Australian Rates

The yen strengthened against all but one of its 16 major peers. Japan’s trade minister Yukio Edano said the country will deal with any speculative currency moves.

Australia’s dollar rose as the nation’s central bank said it was well positioned to respond to global and domestic risks or the threat of an acceleration of inflation, according to minutes of a Sept. 6 meeting at which policy makers kept its cash target unchanged at 4.75 percent.

The so-called Aussie traded 0.2 percent stronger at $1.0239. It earlier fell as low as $1.0149, its weakest since Aug. 11. It gained 0.1 percent to 78.36 yen.

South Korea’s won and Malaysia’s ringgit reached 2011 lows as the European debt crisis damped demand for higher-yield currencies.

“Risk aversion has gone to the next level and the losses are justified, given that European officials have not been able to reassure the markets on the default risk,” said Suresh Kumar Ramanathan, a strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “Asian assets are getting sold off in favor of cash.”

The won dropped 1 percent to 1,1148.90 per dollar after earlier touching 1,156.50, the weakest since Dec. 22, according to data compiled by Bloomberg. Malaysia’s ringgit retreated 0.3 percent to 3.1235 per dollar. It earlier reached 3.1412, the weakest since Dec. 21.

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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