Euro Strengthens as Papandreou Signals He Won’t Call Referendum on Bailout

The euro rose versus the dollar for a second day after Greek Prime Minister George Papandreou signaled he won’t call for a referendum on a bailout plan, easing concern voters would reject it and send the country into default.

The 17-nation currency advanced against the yen for the first time in three days. Earlier the euro approached a three- week low versus the greenback and fell against Japan’s currency after the European Central Bank unexpectedly cut its key interest rate to 1.25 percent and said Europe is heading toward a “mild recession.” The dollar slid versus most major peers as stocks and commodities rallied, damping demand for haven assets.

“I don’t think the euro has got the legs to mount a sustainable rally, but I’m not surprised that it has bounced today,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “No matter how Greece plays out, the imminent risk of default on the failure of a referendum has been removed, so that’s good for the euro.”

The shared European currency gained 0.6 percent to $1.3823 at 5 p.m. in New York, after falling as much as 0.7 percent. It dropped to $1.3609 on Nov. 1, the weakest level since Oct. 12. The euro strengthened 0.6 percent to 107.90 yen. It slid earlier as much as 0.7 percent after the ECB announcement. The Japanese currency was little changed at 78.06 per dollar.

Mexico’s peso was the biggest winner against the U.S. dollar as stocks rose on the interest-rate cut and prospects that Greece will accept the bailout. The currency strengthened 1.5 percent to 13.3333 to the greenback.

The Standard & Poor’s 500 Index climbed 1.9 percent, and the Thomson Reuters/Jefferies CRB Index of raw materials added 1.3 percent.

Worst Performer

South Korea’s won was the worst performer versus the greenback, falling for a fourth day. The country’s overseas shipments increased at the slowest pace in two years last month, rising 9.3 percent from a year earlier, a government report showed on Nov. 1. The won depreciated 0.7 percent today to 1,121.90 per dollar.

The euro has dropped the most over the past year among 10 developed-nation currencies, weakening 3.6 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar fell 1 percent, and the yen rose 1.1 percent.

The implied volatility for one-week euro-dollar options, which indicates expected swings in the underlying currencies, rose to as much as 19.21 percent, the highest since Sept. 26.

‘Sideswiped’ by Headlines

“This is clearly an environment where people can’t take meaningful positions for more than five minutes because you don’t know when you’re going to get sideswiped by the next headline,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York.

Papandreou reached out to his political opposition about setting up a transitional government, indicating an accord would secure aid and remove the need for a referendum on euro membership. The prime minister earlier defied calls to step down after his surprise decision to call the referendum divided his party and Europe.

Led by Germany and France, European leaders yesterday cut off financial aid for Greece until the planned vote took place in December.

“The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?” German Chancellor Angela Merkel told reporters after crisis talks before today’s Group of 20 summit in Cannes, France. French President Nicolas Sarkozy said Papandreou’s government wouldn’t get a “single cent” of assistance if voters rejected the bailout plan.

Euro System Favored

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.

Europe’s debt crisis dominated and distracted the G-20 summit. The region’s failure to fix two years of turmoil drew rebukes from foreign leaders concerned that global economic growth is under threat. Officials discussed a bigger role for the International Monetary Fund.

ECB policy makers unanimously lowered the benchmark interest rate by a quarter-percentage point, confounding 51 of 55 economists in a Bloomberg News survey.

“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half and beyond,” Draghi said at a press conference in Frankfurt following the decision, his first as president of the central bank.

No ‘Profound Shift’

The euro slumped after the reduction, which followed two quarter-percentage point increases earlier this year as former ECB President Jean-Claude Trichet attempted to quell rising inflation.

“When we heard the news about the rate cut, a lot of people looked at that as the real indication that Draghi was not Trichet, that he was willing to be more proactive,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York. “After sitting through the press conference, you came away with a sense that it was much more reactive to a slowdown in the economic activity, and not some real profound shift.”

Draghi signaled officials have no plans to help bail out cash-strapped nations facing an escalating debt crisis that threatens to splinter the euro region. He stuck to the line adopted by Trichet.

The bond purchase program is “temporary, it’s limited in the amount and it’s justified on the basis of restoring the functioning of monetary policy transmission channels,” the new ECB chief said.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

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

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