Euro Drops Most in 3 Months as Region’s Debt-Crisis Concern Damps Demand

The euro fell against the dollar by the most in more than three months and touched an 11-month low as concern increased that the region’s leaders won’t be able to contain the sovereign-debt crisis.

The 17-nation currency weakened as Fitch Ratings said yesterday it lowered France’s rating outlook and put six other European nations on review for a downgrade. Norway’s krone dropped the most against the dollar among the majors after the central bank cut its interest rate more than forecast. The dollar strengthened against all of its most-traded peers as U.S. consumer confidence rose this month, a survey showed before the report next week.

“We’ve seen the market sell the euro on renewed disappointment and renewed concerns about a possible mass downgrade of credit ratings,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “The data in the U.S. points to continued progress in the economic recovery and that’s another driver of dollar strength.”

The euro dropped 2.5 percent to $1.3046 and touched $1.2946 Dec. 14, the lowest level since January. Its drop was the biggest since the five-day period ended Sept. 9. The shared currency weakened 2.3 percent to 101.47 yen. The dollar rose 0.1 percent to 77.76 yen.

Dollar Strength

The dollar has gained 1.7 percent against nine developed- nation counterparts this year, according to Bloomberg Correlation-Weighted Indexes. The euro has dropped 0.8 percent and the yen strengthened 4.8 percent.

Futures traders increased their bets to a record level that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 116,457 on Dec. 13, compared with net shorts of 95,814 a week earlier.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 122 basis points below the euro interbank offered rate, unchanged from last week’s rate. The measure reached 162 in November, which was the most expensive level since October 2008.

The Norwegian krone dropped 3.7 percent to 5.9557 per dollar and fell 1 percent to 7.7686 per euro.

Central Bank

The Norges Bank cut interest rates for the first time since 2009 on Dec. 14. It reduced its main interest rate to 1.75 percent from 2.25 percent, reversing part of a rate-increase cycle that started in October 2009 as the euro debt crisis threatens growth. The median estimate of 17 economists in a Bloomberg News survey had predicted a cut to 2 percent.

The franc gained to a five-week high against the euro after Switzerland’s central bank left its limit on the currency unchanged Dec. 15, resisting pressure from exporters to further curb its strength as officials assess deflation risks.

The Swiss National Bank kept the franc’s minimum exchange rate at 1.20 per euro, in line with the forecasts of nine out of 13 economists in a Bloomberg News survey. The central bank also maintained its benchmark interest rate at zero.

The franc appreciated 1.2 percent to 1.2210 per euro and touched 1.2204 yesterday, the strongest level since Nov. 7. The currency fell 1.4 percent to 93.60 centimes per dollar.

Fitch View

Fitch said a “comprehensive solution” to the euro-zone crisis is “technically and politically beyond reach.” The company said Dec. 12, without taking any action, that a European Union leaders’ summit last week did little to ease pressure on Europe’s sovereign bond ratings.

“There is a positive and negative camp and Fitch is obviously in the negative,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The market is ahead of the ratings agency and the declines we’ve seen in the euro is pricing in a probability of a ratings cut.”

Standard & Poor’s put 15 of the 17 euro nations on “creditwatch negative” last week, pending the outcome of last week’s summit and the actions of central bankers. The ratings company said it would conclude its review of the ratings “as soon as possible” following the leaders’ meeting.

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency. They agreed to move up the creation of the permanent European Stability Mechanism and said that by March the EU will reassess plans to cap the overall lending of the ESM and the temporary rescue fund at 500 billion euros ($652 billion).

Spain’s Debt

The euro pared its weekly decline Dec. 15 after Spain sold 6.03 billion euros of bonds, compared with the maximum target of 3.5 billion euros the Treasury set for the auction. The currency’s 14-day relative strength index against the dollar fell to 29 Dec. 14, below the 30-level that some traders see as a sign a currency may be poised to reverse direction.

The pound rose for four days against the euro, its longest gaining streak since Sept. 5. It added 1.8 percent to 83.91 pence per euro. It fell 0.8 percent to $1.5545.

U.K. Prime Minister David Cameron refused to back the 27- nation European Union pact at the talks, citing the need for ironclad guarantees of a British veto right over future financial regulations. Euro users are seeking to enshrine the debt rules in a revised accord that leaves out the U.K.

Fed Meets

Federal Reserve policy makers led by Chairman Ben S. Bernanke repeated their pledge to keep interest rates low through mid-2013, while refraining from taking more steps to lower borrowing costs.

The Fed’s policy-setting panel, which met in Washington Dec. 13, said the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.” The central bank also said “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

The Thomson Reuters/University of Michigan index of consumer sentiment rose to 68 this month, a six-month high, according to the median estimate of 48 economists in a Bloomberg News survey. The gauge will be published Dec. 22.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, rose 2 percent to 80.141 and touched 80.730 Dec. 14, the highest since Jan. 12.

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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