Euro Weakens in Longest Losing Streak Since 2010 as S&P Downgrades France

The euro slumped for a sixth week, the longest stretch of losses versus the dollar since 2010, as the stripping by France’s top credit rating by Standard & Poor’s magnified concern the region’s financial turmoil will intensify.

The shared currency slid for a third week versus the yen and fell against the majority of its most-traded peers after negotiations between Greece and its creditors were put on hold. Currencies of commodity-producing countries rallied amid bets China’s central bank will ease credit conditions. U.S. inflation rose in December, a report next week may show.

“The ratings downgrades on the face, they are bad but markets have been anticipating this for some time now,” Brian Dolan, chief strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey, said. “The Greek situation is quite dire. If they don’t reach some sort of agreement by the end of next week, they may very likely be forced in to a hard default.”

The euro fell 0.3 percent to $1.2680 yesterday in New York, from $1.2717 on Jan. 6. Its last six-week losing streak ended Feb. 19, 2010. The euro touched $1.2624 yesterday, the weakest level since Aug. 25,2010.

The shared currency depreciated 0.3 percent to 97.57 yen in a third weekly loss. It reached 97.20 yen yesterday, the lowest level since December 2000. The dollar was unchanged versus the Japanese currency at 76.97.

Wagers Against Euro

Futures traders increased bets to a record high that the euro will decline against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise -- so-called net shorts -- surged to 155,195 in the week ended Jan. 10, according to data from the Commodity Futures Trading Commission released yesterday.

The euro dropped yesterday as S&P lowered the top ratings of France and Austria one level to AA+, with negative outlooks, while affirming the ratings of countries that included Germany, Belgium and the Netherlands. The company also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia by one level.

“It’s the same level as the U.S.,” French Finance Minister Francois Baroin said on France 2 television yesterday, disclosing France’s downgrade before S&P announced it. “It’s not a catastrophe,” he said.

S&P had put the ratings of 15 euro nations on review on Dec. 5 for possible downgrades.

Fiscal Compact

The common currency was headed for a weekly gain versus the greenback before yesterday. German Chancellor Angela Merkel discussed Europe’s debt crisis in meetings with French President Nicolas Sarkozy, International Monetary Fund Managing Director Christine Lagarde and Italian Prime Minister Mario Monti.

The euro rose for two days after Merkel said Jan. 9 a blueprint for closer fiscal union among nations that use the currency may be ready a month early. The outline of the budgetary-discipline effort was negotiated at a Dec. 9 summit.

The European Central Bank held its benchmark interest rate at 1 percent on Jan. 12 after lowering it by half a percentage point since November. ECB President Mario Draghi said he saw signs of stabilization in the economy.

The loss by France and Austria of their AAA credit ratings may erode firepower of the euro-region’s bailout fund that’s needed to tap markets to finance aid for Greece, Ireland and Portugal. The European Financial Stability Facility owes its AAA rating to guarantees from the euro region’s top-rated nations.

Global ‘Panic’

“There could be panic around the world on contagion as sovereigns have difficulty acquiring credit,” Axel Merk, president and chief investment officer of Merk Investments LLC in New York, said yesterday in an interview on Bloomberg Television. “We need clarity on reform process, and that causes uncertainty and then you just get downgraded step by step, and that’s not a rosy outlook.”

Greece’s creditor banks broke off talks yesterday after failing to agree with the nation’s government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default. Negotiations have “paused for reflection,” the Institute of International Finance said in an e-mailed statement.

The euro fell 0.4 percent over the past week against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. The New Zealand dollar rose 2 percent in the best performance, while the Swedish krona was the biggest loser with a decline of 0.9 percent.

Testing Switzerland

The franc rose to the strongest against the euro since September after Philipp Hildebrand quit as head of the Swiss National Bank and investors tested the bank’s cap of 1.20 francs per euro. A currency transaction by his wife last year had dented his credibility. The SNB said in a statement the limitation, imposed in September to curb the currency’s strength, “remains unchanged.”

The Swiss currency rose 0.6 percent this week to 1.2076 per euro and touched 1.2063, the strongest level since Sept. 20.

Commodity currencies including Brazil’s real and New Zealand’s dollar rallied amid bets the People’s Bank of China will expand last month’s cut in banks’ reserve-requirement ratio to boost the economy.

The real climbed 3.9 percent to 1.7863 per dollar, the best performance against the greenback among major currencies. It reached 1.7708, its strongest since Nov. 18. New Zealand’s currency rose 1.8 percent to 79.47 U.S. cents. China is the biggest trade partner of both Brazil and Australia.

IntercontinentalExchange Inc.’s Dollar Index (DXY), which tracks the greenback against the currencies of six major U.S. trading partners, rose 0.3 percent to 81.460 in its third weekly gain.

U.S. consumer prices increased in December for the first time in three months, gaining 0.1 percent after stagnating in November, according to the median forecast in a Bloomberg News survey. The government reports the data on Jan. 19.

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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