Euro Declines as European Leaders Withhold Aid Before Greece’s Referendum

The euro weakened against the dollar, falling toward a three-week low, as European leaders said Greece’s referendum on a bailout deal will determine whether it will stay in the 17-nation currency union.

The euro dropped for a third day versus the yen after French President Nicolas Sarkozy said Greece won’t receive a “single cent” in aid without holding to the terms of a rescue agreement hammered out last week. The dollar and yen strengthened against most major counterparts as stocks declined, boosting demand for safer assets. New Zealand’s dollar fell after the nation’s unemployment rate increased.

“I can’t come up with a plan to allow Greece to leave the euro, not without experiencing intense capital flight,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “I don’t think there’s anything here to make the euro bounce. The risks certainly point in the direction of weakness.”

The euro declined 0.2 percent to $1.3717 at 8:42 a.m. London time. It fell to $1.3609 on Nov. 1, the lowest since Oct. 12. The currency lost 0.3 percent to 107.02 yen. The dollar was little changed at 78.04 yen.

The Stoxx Europe 600 Index of shares lost 0.7 percent and the MSCI Asia Pacific excluding Japan Index dropped 1.8 percent. Japanese markets are closed today for a holiday.

ECB Meeting

The euro also slid before Mario Draghi chairs his first European Central Bank policy meeting as president today amid prospects the bank will lower borrowing costs to stem recession risks in the region.

“It is absolutely essential that the ECB cuts rates,” Westpac’s Rennie said. The Australian lender “is forecasting that the ECB starts that process today. Failure to do so would further undermine the outlook for the European economy and should weigh on the euro.”

The euro region’s central bank will keep its key rate at 1.5 percent, according to the median estimate of of 55 economists surveyed by Bloomberg News.

Luxembourg Prime Minister Jean-Claude Juncker said today on ZDF German television that euro-region governments want Greece to remain a member of the currency bloc, although not “at all costs.”

Hardline Tactics

The European leaders’ hardline tactics open the door for the first time for a country to leave the 12-year-old currency bloc. Greek Prime Minister George Papandreou defended his decision to call a referendum, telling reporters at a separate briefing that Greece “needs a wider consensus” for the bailout terms and expressing confidence it will back staying in the euro.

Greek Finance Minister Evangelos Venizelos said the bailout should be implemented without delay and his nation’s membership in the euro region cannot depend on a referendum. More than seven in 10 voters said they favored Greece remaining in the euro system, according to a poll last week of 1,009 people published in To Vima newspaper.

“In the immediate term, it’s going to be a risk-on, risk- off type of environment,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking in Singapore. “The dollar remains a key safe haven.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, climbed 0.5 percent to 77.432.

Dollar Weakens

The greenback declined against most of its major peers yesterday after Federal Reserve Chairman Ben S. Bernanke said the prospect of additional stimulus “remains on the table,” boosting speculation the bank is heading towards a third round of asset purchases, or quantitative easing.

Bernanke spoke at a press conference yesterday after Federal Open Market Committee members kept policy unchanged, saying they would lengthen the maturity of the central bank’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013.

New Zealand’s currency weakened after a statistics bureau report showed the unemployment rate unexpectedly rose to 6.6 percent in the third quarter from 6.5 percent in the previous period. Economists surveyed by Bloomberg had forecast a rate of 6.4 percent.

The so-called kiwi fell 0.8 percent to 78.55 U.S. cents and earlier touched 78.06, the weakest since Oct. 12. It declined 0.7 percent to 61.30 yen.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.