Yen Gains as Greek Bailout Concern Boosts Demand for the Safest Assets

The yen strengthened against all of its major counterparts as concern increased that Greek bailout negotiations will hinder efforts to resolve the financial crisis, boosting demand for haven assets.

The euro fell below 100 yen for the first time in a week as European Union leaders concluded a day of meetings in Brussels, and Italy raised less than its maximum target at a bond sale after Fitch Ratings downgraded the nation last week. The dollar touched the weakest against the yen since Oct. 31, when it reached a record low. The Swiss franc strengthened to the highest level against the euro since September.

“Everyone is waiting to see what would happen on the private sector-involvement,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “Today, the market has taken a risk-aversion tone.”

The yen appreciated 1 percent to 100.34 per euro at 5 p.m. in New York and touched 99.99, the lowest level since Jan. 23. The Japanese currency strengthened 0.5 percent to 76.35 per dollar, reaching 76.22. It touched 75.35 yen Oct. 31, a post- World War II low.

“The pressure is on the downside for dollar-yen,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “We’ve seen it stay in a range for the past three months, but we’re starting to test the bottom of that range again.”

The euro declined 0.1 percent to 1.20528 Swiss francs after sliding to 1.20405, the weakest since Sept. 19. South Africa’s rand and Australia’s dollar declined.

The Standard & Poor’s 500 Index slid 0.3 percent.

‘European Woes’

The Swiss National Bank in September capped the franc’s strength at 1.20 per euro. The president of the central bank at the time, Phillip Hildebrand, resigned earlier this month.

“The Swiss franc is a beneficiary of European woes,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “The SNB, despite some of their leadership changes, have said they’re going to keep their policies.”

Measures of implied volatility climbed as Der Spiegel said Greece may need a bigger rescue package and two euro-area government officials said policy makers are discussing direct interventions in Greek budget decisions.

Implied volatility of three-month options on the euro- dollar currency pair advanced for a second day to 12.52 percent. The implied volatility of Group of Seven currencies rose to 10.58 percent from 10.22 percent on Jan. 30, after falling 10.06 on Jan. 23, the lowest since March 2011, according to the JPMorgan G7 Volatility Index (JPMVXYG7).

Meeting on Greece

An increase in the index makes investments in currencies with higher benchmark lending rates less attractive because the risk in such trades is that market moves will erase profits.

Bargaining with Greece over a debt writedown and its economic management overshadowed efforts to point the way out of the financial crisis by speeding the setup of a full-time 500 billion-euro ($656 billion) rescue fund and signing off on a German-inspired deficit-control treaty.

Leaders completed the fiscal-discipline treaty, which speeds sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. French President Nicolas Sarkozy said Greek debt-swap talks with private bondholders are “going in the right direction” and the issue should be settled in the next few days.

Italian Auction

Italy sold 7.5 billion euros of debt due between 2016 and 2022 today, less than its maximum target of 8 billion euros. Fitch cut the ratings of Italy, Spain, Belgium, Slovenia and Cyprus on Jan. 27, saying they lack financing flexibility in the face of the regional debt crisis. Italy was reduced two levels to A- from A+, and Spain was lowered two grades to A from AA-.

The yield on Portuguese 10-year bonds rose to a euro-era record today, reaching 17.39 percent. Two-year yields rose as high as 21.47 percent. Charging more to lend for shorter periods reflects declining confidence in Portugal’s creditworthiness.

“Portugal is next in line in terms of vulnerability, in terms of an economy that is not getting out of crisis,” Kit Juckes, head of currency strategy at Societe Generale SA in London, said in a radio interview on “Bloomberg on the Economy” with Sara Eisen and Michael McKee. “It is important if we want to stop contagion from Greece, to Italy, Spain, to the rest of Europe, that we turn around focus on getting Greece solved and putting up a firewall.”

Higher-yielding currencies fell the most against the dollar as stocks declined around the world, spurring demand for the relative safety of the greenback.

Fitch Warning

The South African rand tumbled 1.1 percent to 7.8414 per dollar, and Indian rupee slid 1 percent to 49.8 per dollar, Australia’s currency declined 0.6 percent to $1.0599, and the Norwegian krone fell 0.3 percent to 5.8148 per dollar.

Fitch said today it may downgrade Australia’s four largest banks by one level because current ratings don’t reflect their “weaker funding profile.”

The euro has weakened 0.7 percent over the past month according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar has weakened 2.3 percent, and the yen declined 1.5 percent.

Futures traders increased bets the euro will fall versus the dollar, boosting so-called net shorts to a record for a fifth week. The difference between wagers that the shared currency will weaken versus those that it will rise widened to 171,347 on Jan. 24, data from the Commodity Futures Trading Commission showed on Jan. 27.

The euro also fell after its rally last week “ran out of puff” after reaching the 38.2 percent Fibonacci retracement level of the drop from Oct. 27 to Jan. 13, Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, wrote in a note to clients.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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

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