The euro fell from a two-month high against the dollar as European finance ministers withheld an aid package necessary to prevent the Greek economy from collapsing.
The shared European currency slid from the highest since December against the yen as Greek Prime Minister Lucas Papademos obtained approval from his Cabinet for deeper budget cuts needed to secure the second package of international aid. The dollar strengthened against all but one of its 16 major peers as stocks slid. Australia’s dollar dropped for a third day after the nation’s central bank lowered growth forecasts.
“There is more chance of me seeing God this weekend than Greece getting its fiscal issues sorted out,” said Thomas Molloy, chief dealer at FX Solutions, an online currency-trading company, in Saddle River, New Jersey. “Your average investors have become absolutely jaded with this whole saga so they are sitting on the sidelines with the euro.”
The euro was 0.7 percent weaker at $1.3197 at 5 p.m. New York time, paring its weekly advance to 0.1 percent. It reached $1.3322 yesterday, the strongest level since Dec. 12. Europe’s shared currency slipped 0.7 percent to 102.43 yen. The dollar fell 0.1 percent to 77.61 yen. It earlier advanced to 77.81 yen, the strongest level since Jan. 26.
The yen has weakened 1.6 percent against the euro this week and fallen 1.3 percent against the dollar.
The Greek cabinet approved the 287-page document unanimously, said a government official, who declined to be named. The approval means the 300-seat Parliament will vote, as soon as today, on budget measures amounting to 7 percent of gross domestic product over the next three years and a debt swap to slice 100 billion euros ($132 billion) off more than 200 billion euros of privately-held debt.
The approval capped a week of tension in Athens as European Union and International Monetary Fund officials argued with Greek government officials over the conditions required to secure the 130 billion-euro rescue package.
The euro has rallied 4.5 percent versus the dollar from the January low of $1.2624 amid speculation Greek lawmakers would satisfy demands from the European Commission, ECB and IMF to receive the aid package. It is trading 11 cents above its lifetime average of $1.2060.
“The big problem with this adjustment process is that it’s seen growth collapse and essentially depression already taking place,” Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. said in an interview on “Bloomberg Surveillance” on Bloomberg Radio. “Having massive wage cuts to regain competitiveness is not going to be fun for anybody. On the other hand, the other option is to have a disorderly default.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, was 0.5 percent higher at 79.001.
Australia’s currency slid versus most of its major peers after the nation’s central bank said it sees the economy expanding 3.5 percent this year, down from its Nov. 4 estimate of 4 percent. Consumer prices will rise 3 percent in the year through to the fourth quarter, less than a previous prediction of 3.25 percent, the Reserve Bank of Australia said in its quarterly monetary policy statement released today.
The so-called Aussie weakened 1 percent to $1.0674 and depreciated 1.1 percent to 82.84 yen.
The Bloomberg-JPMorgan Asia Dollar Index (ADXY) fell for the first week this year, retreating 0.6 percent, led by the Indian rupee’s biggest drop since November. The rupee slid 1.5 percent this week to 49.41 per dollar, according to data compiled by Bloomberg.
The implied volatility of three-month options for Group of Seven currencies fell as low as 9.79 percent, the least since August 2008, according to the JPMorgan G7 Volatility Index, before rising to 10.15. 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.
Declining volatility in currency markets “tells you that you should be getting into the higher-yielding currencies. But then the question, of course, is how long will this last for?” said Adrian Foster, head of financial-markets research for Asia at Rabobank Groep NV in Hong Kong. “Once people start observing it, more speculative money starts to pile in on the carry trade and sows the seed of its own destruction.”
Higher-yielding currencies have surged in 2012 as improving data in the U.S. has sapped demand for the perceived havens of the dollar and the yen.
The Mexican peso has appreciated 8.9 percent versus the greenback in 2012, the Brazilian real strengthened 8.4 percent and New Zealand’s dollar gained 6.4 percent. Mexico’s benchmark lending rate is 4.5 percent, Brazil’s is 10.5 percent and New Zealand’s is 2.5 percent compared with a low near zero in the U.S. and Japan.
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