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Euro Weakens on Speculation Sovereign-Debt Crisis Is Spreading

The euro weakened against its most- traded counterparts as a drop in German industrial production, lower U.K. growth forecasts and ratings cuts for Spain and Italy raised concern Europe’s sovereign-debt crisis is worsening.

The pound strengthened by the most in more than a month against the euro after Bank of England Governor Mervyn King said cutting U.K. interest rates may be counterproductive, damping speculation the central bank will reduce borrowing costs to spur growth. The currencies of Sweden and Norway strengthened to 12- and nine-year highs against the euro on haven demand.

“When we look at the euro from a medium-term perspective, I think we’ve been looking for some economic divergence between Europe and the rest of the world,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said on Bloomberg Television’s “Lunch Money” in an interview with Sara Eisen. “It’s still keeping us negative on the euro over the next two or three quarters.”

The euro fell 0.3 percent to $1.2365 at 5 p.m. New York time after rising to $1.2444 on Aug. 6, the strongest level since July 5. The shared currency dropped 0.5 percent to 96.97 yen. Japan’s currency climbed 0.2 percent to 78.43 per dollar.

The 17-nation euro may drop to as low as $1.2280 in the next week, said Kathleen Brooks, a research director in London at Forex.com, a unit of online currency-trading company Gain Capital Holdings Inc.

‘To Parity’

“Structurally, I’m looking for the euro to go to parity,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd., said in a television interview on “Countdown” with Linzie Janis. “It will take about a year, but we are heading in that direction.”

The Swedish krona appreciated 1 percent to 8.2546 against the euro, its highest level since 2000, before trading at 8.2675. Norway’s krone rose to its highest level since 2003 against the shared currency, gaining as much as 1.1 percent to 7.2585.

“There’s a lot of focus on these currencies as safe havens with strong fundamentals,” Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen, said in a telephone interview. “There’s a double effect of demand for these currencies and a weak euro. A lot of investors are favoring these currencies.

The krona will reach 8.0480 per euro as long as it stays below the area from 8.4635 to 8.5052, Credit Suisse Group AG research analysts wrote today in a client note. The Swedish currency’s strongest level since the shared currency’s 1999 inception is 8.0469, reached in May 2000.

Ratings Cuts

India’s rupee fell versus most major peers after global lenders cut forecasts more than for any other Asian currency as the weakest monsoon since 2009 led the Reserve Bank of India to reduce growth estimates. The rupee declined 0.6 percent to 55.4150 per dollar.

Spain was cut two steps to A (low) from A (high) and Italy was downgraded one level to A, Toronto-based DBRS said in a statement. Ireland’s grade was confirmed at A (low), four steps from junk.

Italy faces ‘‘persistent stress in market-funding conditions and rising systemic risks,” and financing conditions also pose a threat to Spain’s growth outlook, DBRS said. Doubts about the euro area’s policy response to the crisis contributed to both downgrades, it said.

The British pound gained 0.5 percent to 78.98 pence per euro after strengthening as much as 0.7 percent, the most since July 5. The U.K. currency rose 0.2 percent to $1.5656.

‘Very Short’

Sterling rose against most of its 16 major counterparts after the BOE’s King signaled continued support for Prime Minister David Cameron’s budget squeeze, damping speculation the central bank will reduce borrowing costs to spur growth.

King spoke after publishing the central bank’s quarterly Inflation Report, which included forecasts showing annual gross- domestic-product growth of about 2 percent in two years. That compares with a projection in May of 2.5 percent.

“King hinted that they aren’t going to go ahead with a rate cut, and the market had priced that in already,” said Chris Walker, a currency strategist at UBS AG in London. “If there’s less of a chance of a rate cut, that’s a catalyst for pound support. The market was very short going in to the press conference.” A short position is a bet an asset will fall.

The euro also weakened as reports showing declines in German industrial production and exports added to evidence Europe’s crisis is negatively affecting the region’s largest economies.

German industrial production declined 0.9 percent in June from May, when it gained a revised 1.7 percent, the Economy Ministry in Berlin said. Exports, adjusted for work days and seasonal changes, fell 1.5 percent from May, when they jumped 4.2 percent, the Federal Statistics Office said in Wiesbaden.

Euro ‘Negative’

“Although the data has been disappointing, I don’t think it’s necessarily surprised market participants,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a television interview on “Lunch Money” with Sara Eisen. “So it’s still keeping us negative on the euro over the next two or three quarters.”

A senior ally of Chancellor Angela Merkel said Bundesbank President Jens Weidmann’s objection to European Central Bank proposals to lower government borrowing costs won’t sway German backing for the ECB’s crisis-fighting plans.

‘Very Positive’

ECB President Mario Draghi’s “clear” announcement that he will link central bank purchases of euro-area government debt to action by the region’s rescue fund “isn’t problematic from my point of view,” Michael Meister, the deputy parliamentary leader of Merkel’s Christian Democratic Union party, said yesterday in a telephone interview. “It’s very positive.”

Standard & Poor’s yesterday lowered the outlook on Greece’s CCC rating, already eight levels below investment grade, to negative from stable. The change reflected the risk of a downgrade if Greece is unable to obtain the next disbursement from the European Union and International Monetary Fund rescue package, the ratings company said yesterday.

Greece’s economy has been squeezed by the fiscal tightening needed to qualify for rescue-loan disbursements, with gross domestic product shrinking for five straight years and unemployment rising to 22.5 percent from 7.9 percent. Finance Minister Yannis Stournaras said yesterday the government is still working on identifying almost a third of the cuts required by international creditors to resume the flow of bailout funds.

“We need the ECB to step up with a plan,” Geoff Kendrick, head of European currency strategy at Nomura International Plc, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton. “There are still a number of steps that are very complex, which is why the euro is much more likely to continue to drift lower.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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