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Euro Declines For Second Day as S&P Cuts Ratings, Greek Debt Talks Resume

The euro weakened for a second day, falling to an 11-year low against the yen after Standard & Poor’s stripped France of its top credit rating and cut eight other euro-region countries.

Japan’s currency gained against 14 of 16 major peers as concern that Europe’s fiscal turmoil will intensify boosted demand for a haven. Portuguese 10-year yields rose to a record versus bunds. Greek officials will reconvene with creditors on Jan. 18 after discussions stalled last week over the size of investor losses in a proposed debt swap. Asian currencies weakened before a report tomorrow that may show China’s economy expanded at the slowest pace in almost two years.

“The ratings downgrade provides more evidence that the euro-zone sovereign debt crisis has a lot further to run,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The fundamentals still argue in favor of a continued adjustment lower in the euro.”

Europe’s shared currency was 0.3 percent weaker at 97.28 yen at 4:45 p.m. New York time, after falling to 97.04, the least since December 2000. The euro fell 0.1 percent to $1.2666, after dropping to $1.2626. The dollar dipped 0.25 percent to 76.78 yen. U.S. markets are closed today for a holiday.

The euro stayed lower after French borrowing costs fell at a sale of treasury bills. France sold 1.895 billion euros of one-year notes at a yield of 0.406 percent, down from 0.454 percent on Jan. 9. The Treasury sold a total of 8.59 billion euros in bills, including three and six-month paper. Yields fell on all.

‘Grinding Lower’

The euro dropped on Jan. 13 amid reports of imminent ratings cuts before S&P lowered the top grades of France and Austria one level to AA+, with “negative” outlooks. The company affirmed the ratings of countries including Germany, Belgium and the Netherlands and downgraded Italy, Portugal, Spain and Cyprus by two steps and Malta, Slovakia and Slovenia by one level.

The ECB bought Italian and Spanish government bonds today, according to four people with knowledge of the transactions, who declined to be identified because the deals are confidential.

“There are a lot of risks to the euro, including the Greek debt talks,” said Chris Walker, a currency strategist at UBS AG in London. “The ECB has come in earlier than they usually do, and that’s stabilizing things a bit. We still see euro-dollar grinding lower.”

EFSF Downgrade

The European Financial Stability Facility, the euro-region bailout fund, is scheduled to sell 1.5 billion euros of bills tomorrow, while Greece and Spain also offer bills. The fund lost its top credit rating at S&P after the rating company downgraded sponsoring nations France and Austria.

The EFSF’s rating was lowered to AA+ from AAA, S&P said in a statement today.

“Markets are going to remain pretty nervous” until we see the results of European debt auctions this week, said Michael Turner, a fixed-income strategist in Sydney at Royal Bank of Canada. “The yen and the dollar should outperform.”

Italy’s government must refinance about 341 billion euros of securities coming due this year, with another 54 billion euros in interest payments, data compiled by Bloomberg show. France has 266 billion euros in debt coming due, plus 39 billion euros in interest, while Germany needs to find 193 billion euros for principal repayments and 22 billion euros for interest.

Euro Shorts

Talks between Greece’s Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos, and Charles Dallara, the managing director of the Institute of International Finance, which represents private creditors, will resume Jan. 18, according to a Greek Finance Ministry official who declined to be identified. Greece’s creditor banks last week broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds.

Futures traders increased bets to a record that the euro will weaken against the dollar. The difference between wagers that the shared currency will fall versus those that it will rise surged to 155,195 in the week ended Jan. 10, data from the Commodity Futures Trading Commission showed on Jan. 13.

“We’ve got that large overhang of shorts in the euro, but there’s still no reason to go the other way yet,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada’s RBC Capital Markets unit. “We’re probably going to continue to have this slow bleed. We’ve got nothing really that suggests the euro zone is coming to grips with the problem. We still have a number of concerns about the growth backdrop there, the sovereign backdrop.”

Yen Range

The euro has depreciated 1.82 percent this month, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 0.73 percent over the same period, while the yen gained 0.92 percent.

The yen will trade in a range from 72 to 79 per dollar for the next six months, former Japanese Finance Ministry official Eisuke Sakakibara said. Intervention in the currency market will only work with U.S. cooperation, he said today at the Foreign Correspondents’ Club of Japan in Tokyo. Japan’s government intervened in the foreign-exchange market at least three times last year to keep the yen’s gains from hobbling the country’s recovery.

The yen rose 5.2 percent against the dollar last year, after a 13 percent gain in 2010.

Canada’s dollar rose against all of its 16 major peers on speculation its exports will benefit from accelerating U.S. economic growth. Regional reports from the New York Fed on Jan. 17 and the Philadelphia Federal Reserve on Jan. 19 may show manufacturing continued to pick up in January, according to economist surveys.

The currency, nicknamed the loonie, strengthened 0.53 percent to C$1.0178 per U.S. dollar. One Canadian dollar buys 98.25 U.S. cents.

Chinese Growth

The South Korean won fell by the most in more than a week while Thailand’s baht retreated to a 17-month low as Europe’s debt crisis clouded the prospects for a global economic recovery.

The won slumped 0.6 percent to 1,154.85 per dollar in Seoul. In Bangkok, the baht fell 0.3 percent to 31.9 and earlier reached 31.96, the weakest level since August 2010.

China’s economy probably expanded at an annual rate of 8.7 percent last quarter, according to the median forecast in a Bloomberg News survey, compared with 9.1 percent in the preceding three months. That would be a fourth straight quarter of deceleration.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Chris Fournier in Halifax, Nova Scotia at Cfournier3@bloomberg.net.

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

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