Euro Weakens From 3-Month High as Crisis Optimism Wanes

The euro fell for the first time in four days versus the dollar as investors expressed skepticism that the region’s debt crisis is being contained.

The shared currency slid versus most of its 16 most-traded peers as Greece’s coalition failed to reach a deal on 11.5 billion euros ($14.7 billion) of spending cuts. A German court will rule on the nation’s participation in Europe’s permanent bailout fund in two days, when the Netherlands is due to hold elections. Implied volatility of three-month options for Group of Seven currencies fell to an almost five-year low.

“We had a fairly sizable rally in the euro late last week,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said in a telephone interview. “There’s still significant event risk this week, and markets are understandably in a more cautious mode.”

The euro fell 0.5 percent to $1.2758 at 5 p.m. New York time, after reaching the highest level last week since May 22. It was 0.4 percent weaker at 99.88 yen. The dollar rose 0.1 percent to 78.29 yen.

The 17-nation currency’s 14-day relative strength index dropped below 70 after exceeding it on Sept. 7 for the first time since May 2011. A reading above 70 signals an asset may have rallied too far, too quickly and is due for a correction.

Next Level

The euro may rise toward its 200-day moving average, currently at $1.2838, during the next week, according to Michael Derks, chief strategist at FxPro Group Ltd. in London. The shared currency has only traded above the key average on three days during the past year, according to data compiled by Bloomberg.

If the shared currency rises above 100.73 yen, the 38.2 percent Fibonacci retracement level from the 2012 high reached in March, it may gain to 101.40 yen, followed by 101.83, the 200-day moving average and the highest level since May 22, Niall O’Connor, a New York-based technical analyst at JPMorgan Chase & Co., said in an interview.

The euro has fallen 3.4 percent this year, the second-worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has dropped 3.6 percent, while the dollar has declined 1.7 percent.

The Norwegian krone weakened against all of its 16 major peers after a report showed underlying consumer prices slid 0.7 percent in August.

The currency dropped 1.3 percent to 5.7930 per dollar.

Price Swings

Implied volatility of three-month options for Group of Seven currencies touched 7.87 percent, the lowest level since Oct. 18, 2007, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark rates more attractive because it shows the risk is smaller that market moves will erase profits on such trades.

Even so, the UBS AG V24 Carry Index, which measures returns from borrowing in lower-rate currencies to buy higher-yielding ones in so-called carry trades, has fallen 2.8 percent from a four-month high on Aug. 9.

Bloomberg Correlation-Weighted Indexes show that the worst- performing major currency in the past month was the Australian dollar, typically a beneficiary when investors are bullish on the economy because the nation has the highest interest rates among developed economies.

The euro may appreciate to $1.30 if the Federal Reserve announces another round of quantitative easing, Athanasios Vamvakidis, head of G-10 currency strategy at Bank of America Merrill Lynch, said in an interview on Bloomberg Television’s “On the Move” with Mark Barton.

“The increase of demand for the risk has supported the euro,” he said. “If we get QE, or to some extent it’s priced in, we may see some further strengthening.”

Quantitative Easing

The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of its quantitative-easing strategy. In an Aug. 31 speech, Fed Chairman Ben S. Bernanke defended his unprecedented policies and laid out arguments for further action to combat unemployment, which he called a “grave concern.”

The central bank’s policy-setting Federal Open Market Committee will start a two-day policy meeting on Sept. 12 amid speculation it will introduce a third round of asset purchases.

Barclays Plc forecast the FOMC will announce this week open-ended asset buying or purchases of as much as $500 billion through mid-2013 to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. and BNP Paribas SA, responding to last week’s report of slowing job growth, said an open-ended purchase plan may be announced on Sept. 13.

Australia’s dollar weakened as separate reports indicated the pace of global growth may be slowing.

Japanese GDP

Japan’s gross domestic product grew an annualized 0.7 percent in the three months through June, the Cabinet Office said in Tokyo today, less than a preliminary calculation of 1.4 percent. A government report also showed that China’s imports dropped 2.6 percent in August from a year earlier, marking the first decline since January.

The Aussie depreciated 0.5 percent to $1.0335 and retreated 0.4 percent to 80.91 yen. China is Australia’s biggest export market.

The Australian currency could experience “additional upside follow-through” after increasing 0.6 percent versus the greenback last week, according to JPMorgan, citing technical indicators. If the Aussie climbs past a resistance level at $1.04, it could appreciate to $1.0550 and then $1.0615, Niall O’Connor, a New York-based technical analyst at the firm, wrote today in a note to clients.

Greek Measures

Greek Democratic Left leader Fotis Kouvelis, whose party is one of the three in the coalition government, said no decision had been made on spending cuts and that poorer citizens must be protected from austerity measures. The three leaders agreed to meet again on Sept. 12, two days before euro-area finance ministers gather in Cyprus for a briefing on Greek progress.

Germany’s Federal Constitutional Court is due to rule Sept. 12 on the country’s participation in the European Stability Mechanism, a permanent 500 billion-euro fund that offers loans to member states and may buy their bonds to lower borrowing costs. Germany will be the biggest contributor to the fund with a 27 percent share, a statement from the European Commission shows.

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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