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Euro Declines Versus Dollar as Greek Debt Turmoil Curbs Demand

The euro fell to a four-month low against the dollar after the European Central Bank said it will temporarily stop lending to some Greek banks and as the nation’s leaders prepare for a second election.

The euro dropped for a fourth day versus the greenback as the ECB said it will push the responsibility for lending onto Greece’s central bank until the banks have sufficiently boosted their capital. The pound fell the most in a month against the dollar as the Bank of England said U.K. growth will stay “subdued” in the near term. The dollar pared gains against the yen after minutes from the last Federal Reserve meeting showed some policy makers said further easing may be needed if the economic recovery falters.

“The big news that’s grabbing the headlines is the Greek elections that are going to happen,” said John Doyle, director of markets in Washington at currency-trading firm Tempus Consulting Inc. “If Greece does have to exit the euro zone, what does that mean for some of the other southern economies? The dollar continues to gain across the board.”

The euro fell 0.1 percent to $1.2716 at 5 p.m. in New York after rising as much as 0.2 percent. It touched $1.2681, the weakest level since Jan. 17. The euro pared its gain against the yen strengthen 0.1 percent to 102.15 yen after rising as much as 0.6 percent.

The ECB said in an emailed statement that it will temporarily stop lending to some Greek banks to limit its risk.

‘Shift the Burden’

A 130 billion-euro ($165 billion) bailout earlier this year provided a 50 billion-euro fund to recapitalize Greek banks after they reported losses from the country’s debt restructuring, the largest ever. Greece’s four biggest banks are waiting for European Union approval to receive 18 billion euros of bonds issued by the European Financial Stability Facility for their recapitalization, Imerisia reported today, without saying how it got the information.

The ECB can only lend to sound banks and therefore won’t allow undercapitalized institutions to access its refinancing operations, a euro-area official said on condition of anonymity.

“The ECB is by far the most exposed to Greece so they’re trying to shift the burden to somebody else,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “They need the EFSF to start operation.”

The Dollar Index, which IntercontinentalExchange Inc. uses to gauge the greenback against the currencies of six U.S. trading partners, rose 0.2 percent to 81.414. It is the 13th consecutive gain for the index in the longest string of increases since its inception in 1973.

FOMC Minutes

Several Fed policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery on track, according to minutes of the Federal Open Market Committee’s April 24-25 meeting released today in Washington.

Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years. Chairman Ben S. Bernanke said following the meeting that policy makers “remain entirely prepared” to take additional actions if necessary.

The implied volatility of three-month options on Group of Seven nations’ currencies rose to as high as 10.94 percent, the highest since Jan. 9, according to a JPMorgan Chase & Co. index. The measure has averaged 11.6 percent over the past year. Greater volatility makes investments in currencies with higher benchmark lending rates less attractive because the risk in such trades is that market moves will erase profits.

‘A Greek Exit’

Greece’s Democratic Left leader Fotis Kouvelis said a new caretaker government decided by party leaders today would have one task, that of holding elections. He said elections would most likely be held on June 17. President Karolos Papoulias failed to broker a governing coalition in meetings yesterday.

The deadlock in Greece has sparked uncertainty over the country’s pledged spending cuts required by the terms of its two bailouts worth 240 billion euros negotiated since May 2010.

“As the week progresses, the risk that there is a Greek exit -- along with all the baggage that goes along with it -- continues to be very real,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York.

The euro has lost 1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 1.2 percent over the period.

‘Euro-Zone Fallout’

The pound weakened for a second day against the dollar after central bank Governor Mervyn King said the U.K. faced threats from the euro region’s “storm” as he released the quarterly Inflation Report in London.

The Bank of England this month halted its bond-purchase, or quantitative easing, program at 325 billion pounds ($519 billion).

“The pound is lower given King’s concerns over the euro-zone fallout and the possible negative impact on the U.K. economy,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There were certainly no signs of further QE being off the table.”

The pound fell 0.5 percent to $1.5910 after dropping as much as 0.7 percent, the biggest decline since April 13. Sterling slid 0.4 percent to 79.92 pence per euro.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

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

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