Euro Falls to Lowest in 5 Days Versus Dollar

The euro fell to its weakest level in almost a week versus the dollar as investors speculated European policy makers won’t be able to reach an agreement regarding Greece’s debt obligations.

Canada’s dollar fell from a three-month high against its U.S. counterpart after the nation’s economy unexpectedly contracted in the fourth quarter. The dollar and yen pared earlier losses as stocks fell after consumer confidence and business activity in the U.S. was weaker than forecast in January. The euro declined against the majority of its most- traded peers as Standard & Poor’s increased the number of Portuguese banks on “creditwatch negative.”

“I think the data in the U.S. was a bit lackluster,” said Daniel Brehon, a currency strategist at Deutsche Bank in New York. “We had a strong equity market rally this month and we expected to see better.”

The euro closed down 0.5 percent to $1.3084 at 5 p.m. New York time, after touching $1.3042, the lowest level since Jan. 25. The dollar fell 0.1 percent to 76.27 yen after touching 76.16 yen, the weakest level since Oct. 31. The European shared currency fell 0.6 percent to 99.78 yen.

New Zealand’s dollar and South African rand rallied as investors sought higher-yielding assets.

Consumer Confidence

The dollar gained against half its major counterparts after Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 60.2 from 62.2 in December. Consumer confidence unexpectedly dropped in January as gas prices picked up and more Americans said jobs are hard to get. Tomorrow the Institute of Supply Management will report its January manufacturing figure, and private sector employment for the past month will also be reported.

Greece pledged a last-ditch effort to prevent the collapse of a second rescue package from creditors, aiming to complete talks this week on a financial lifeline that’s been in the works for six months.

Greek Premier Lucas Papademos said he wants to bring the negotiations “to a successful conclusion by the end of the week” for a debt-swap agreement with Greece’s creditors. Representatives of the European Commission, the European Central Bank and the International Monetary Fund want more fiscal tightening and wage cuts from Greece, the prime minister told reporters after the European Union meeting.

“There is still no news on the Greek private-sector involvement, and it will now drag out until Feb. 13, so that has weighed on sentiment,” said Mary Nicola, a New York-based currency strategist at BNP Paribas SA. A formal offer for a debt swap must be made by Feb. 13, Greek Finance Minister Evangelos Venizelos told reporters in Athens today.

Portuguese Banks

S&P took action on Portuguese banks following the downgrade of the nation’s sovereign credit on Jan. 13. Banco Espirito Santo SA and its core subsidiaries were placed on watch, while multiple banks already on negative watch had statuses affirmed. Yields on Portuguese two-year securities reached a record today of 21.82 percent.

China and the euro zone will release tomorrow their Purchasing Managers Index figures for January. Both are expected at a value below 50, according to analysts surveyed by Bloomberg, which implies contraction in the manufacturing sector.

“PMI globally has been stabilizing or heading up for three or four months, so to break that trend would be interesting for the markets,” Brehon said. “If China is below 50, you’ll start to hear the talk about a slowdown in China.”

Risk-Reversal Rates

The cost to protect against a drop in the euro versus the dollar fell from a three-week high. Risk-reversal rates for three-month options on the euro versus the dollar rose to negative 1.91 percent today, the most since Jan. 9. The measure reached negative 4.4 percent in November.

Japan refrained from selling yen in the foreign-exchange market this month, the Ministry of Finance said today on its website. The nation sold the currency on Oct. 31 when it climbed to a postwar record of 75.35 per dollar.

Japan’s Finance Minister Jun Azumi said his ministry is prepared to take “decisive” measures to curb the yen’s appreciation as it approached a post-World War II high.

Canada’s dollar was little changed at C$1.0027 after gross domestic product posted an unanticipated decline in November, shrinking for the first time in six months on maintenance shutdowns by crude oil producers and lower natural gas extraction. The currency had earlier gained as much as 0.5 percent to 99.65 cents per U.S. dollar, the strongest level since Oct. 31.

Implied Volatility

Implied volatility of three-month options of Group of Seven currencies dropped to 10.60 percent from as high as 10.61 percent yesterday, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

The dollar and yen, whose countries’ interest rates are near zero, weakened as investors sold the currencies to fund investments in higher-yielding counterparts. The New Zealand dollar advanced 0.9 percent to 82.68 U.S. cents, Australia’s currency climbed 0.2 percent to $1.0621 and South Africa’s rand gained 0.4 percent to 7.8108 per dollar.

New Zealand’s dollar is the best performer year-to-date among the 10 developed nation currencies measured by the Bloomberg Correlation-Weighted Indexes, with a 4.7 percent gain. The dollar is the worst performer, falling 2.1 percent. The euro has declined 1.1 percent and the yen has weakened 1.2 percent.

To contact the reporters on this story: Austen Sherman in New York at asherman18@bloomberg.net; 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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