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Euro Falls to One-Year Low on Concern Greek Crisis Will Spread

Euro notes and coins
A file photograph shows euro notes and coins arranged for a photograph in London. Photographer: Chris Ratcliffe/Bloomberg

The euro fell to the lowest since April 2009 on concern the European Union and International Monetary Fund’s 110 billion-euro ($143 billion) aid package for Greece will fail to contain the region’s debt crisis.

The euro dropped for a third day versus the dollar as German Chancellor Angela Merkel prepares to speak to parliament today on the bailout after her coalition said allowing the “orderly” default of region members burdened with debt may avoid a repeat of the Greek crisis. The dollar advanced toward an eight-month high against the yen on optimism the U.S. economy will recover at a faster pace than Japan’s.

“A renewed wave of pessimism is sweeping markets,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Fresh concerns over contagion from the Greek fiscal crisis are seeing risk aversion soar. This is causing investors to ditch the euro in favor of ‘safe haven’ currencies such as the yen and the dollar.”

The euro declined to $1.2953 as of 6:30 a.m. in London from $1.2987 in New York yesterday, after dropping to $1.2937, the weakest since April 2009. The currency was at 122.80 yen from 122.78 yen, after touching 122.51, the lowest since April 28. The single currency fell 0.2 percent to 85.58 U.K. pence.

The dollar climbed 0.3 percent to 1.1061 Swiss francs, after reaching 1.1073, the strongest since May 2009. The greenback bought 94.78 yen from 94.54 yen. Financial markets were shut today in Japan for a holiday.

European Bonds

The euro traded near an eight-month low versus the pound as bond yields from Spain to Portugal and Ireland climbed yesterday on speculation the crisis that began in Greece is spreading.

Yields on 10-year Greek bonds rose 90 basis points to 9.40 percent yesterday. The rate on similar-maturity debt in Spain climbed nine basis points to 4.13 percent and Portuguese yields advanced 35 basis points to 5.48 percent.

Merkel will open debate on aid for Greece in a speech to parliament in Berlin. Greek unions plan their third general strike of the year today after workers yesterday occupied the Acropolis and shut down schools and hospitals at the start of a 48-hour walk-out.

“The situation has evolved from a Greece crisis into a threat against the stability of the European Monetary Union,” said Philip Wee, senior currency economist at DBS Group Holdings Ltd. in Singapore. DBS cut its end-of-June target for the euro to $1.26 from $1.32, Wee said.

The European Union’s three-year financial lifeline requires Greece to reduce its budget deficit below the region’s limit of 3 percent of gross domestic product by the end of 2014, a year later than originally planned.

Dollar Gains

The dollar strengthened versus the yen before U.S. reports today that economists said will show companies added jobs in April and service industries expanded at the fastest pace in almost five years.

The Fed is likely to raise its benchmark interest rate to 0.75 percent from as low as zero by the end of 2010, while the Bank of Japan is expected to keep its overnight lending rate at 0.1 percent, according to Bloomberg News surveys.

“The greenback is being helped by more reports suggesting that the U.S. economy is growing much faster than the other major economies and is likely to be the first to hike interest rates,” said John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney.

U.S. Jobs

U.S. companies hired 30,000 workers last month, after a 23,000 decline in March, a Bloomberg survey showed before the report from ADP Employer Services. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 56 in April from 55.4, another survey showed.

Standard & Poor’s this week indicated that a fiscal plan scheduled for next month by Japanese Prime Minister Yukio Hatoyama’s government may be key to whether it will cut the nation’s sovereign credit rating.

The proposal will be “an important statement of the government’s commitment” to rein in the deficit, said William Hess, director of sovereign ratings for Asia.

Losses in the euro were tempered after a technical chart signaled its 2.6 percent slump since April 30 was too rapid.

The European currency’s 14-day stochastic oscillator against the dollar declined to 2.3 today, below the 20 level that some traders use to signal an asset has weakened too quickly and is poised to advance.

“It’s buying on dips after the sharp fall,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is just position adjustment.”

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